Question

Too Young, Inc., has a bond outstanding with a coupon rate of 6.4 percent and semiannual payments. The bond currently sells for $1,940 and matures in 20 years. The par value is $2,000. What is the company's pretax cost of debt?

• 3.31%

• 7.24%

• 6.67%

• 6.81%

• 7.00%

Answer 1

Too Young, Inc., has a bond outstanding with a coupon rate of 6.4 percent and semiannual payments. The bond currently sells for $1,940 and matures in 20 years. The par value is $2,000. What is the company's pretax cost of debt?

$Price = \frac{\frac{Coupon \ rate }{2}\times par \ value}{(1+\frac{YTM}{2})^{0.5 \times 2}} + ... +\frac{\frac{Coupon \ rate }{2}\times par \ value}{(1+\frac{YTM}{2})^{20 \times 2}} +\frac{ par \ value}{(1+\frac{YTM}{2})^{20 \times 2}}$

$1940 = \frac{\frac{0.064}{2}\times 2000}{(1+\frac{YTM}{2})^{0.5 \times 2}} + ... +\frac{\frac{0.064}{2}\times 2000}{(1+\frac{YTM}{2})^{20 \times 2}} +\frac{ 2000}{(1+\frac{YTM}{2})^{20 \times 2}}$