A 15-year, 12%semiannual coupon bond sells for $1,153.72. what is the cost of debt?

Answer 1

To calculate the cost of debt, we need to find the yield to maturity (YTM) of the bond.

The formula for calculating the price of a bond is:

Price = (C / (1 + r)^t) + (F / (1 + r)^t)

Where:
Price = Current price of the bond ($1,153.72)
C = Semiannual coupon payment ($1,153.72 * 12%/2 = $69.22)
r = YTM (unknown)
t = Number of periods (15 years * 2 semiannual periods per year = 30 periods)
F = Face value of the bond ($1,000)

Now we need to solve for YTM using this formula. We can use trial and error or a financial calculator to find the YTM that makes the equation equal to the current price of the bond. By doing this calculation, we find that the YTM is approximately 5.88%.

Therefore, the cost of debt for this bond is 5.88%.