Question

Hydro Systems has 15-year bonds outstanding with a coupon rate of 6 percent. Interest is paid annually. The face amount of each bond is $1,000. What is the company's pre-tax cost of debt if the bonds currently sell for $1,080?

A) 5.22 percent
B) 5.55 percent
C) 4.71 percent
D) 5.36 percent
E) 4.42 percent

Answer 1

A) 5.22 percent

Step-by-step explanation:

The Pretax cost of debt is the Yield to maturity (YTM) of bond.

Using a financial calculator , you can solve for the YTM with the following inputs;

Face value ; FV = 1000

Maturity of bond; N = 15

Annual coupon payment; PMT = coupon rate * Face value = 6%*1000 = 60

Current price; PV = $1,080

then compute annual interest rate; CPT I/Y = 5.22%