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You are trying to estimate the cost of debt for a firm. The firm has one...

You are trying to estimate the cost of debt for a firm. The firm has one bank loan and two bonds outstanding. The bank loan has an interest rate of 6%. The first bond has 2 years left to maturity and a 5% YTM. The second bond has 11 years left to maturity and a 7% YTM. What should you use for the cost of debt?

The answer is 7%, please explain WHY.

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Answer #1

We take the most recent issue for the cost of debt and going by the time left for bond 2 this is the most recent bond hence we will take the ytm of this bond as the cost of debt that is 7%

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