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Suppose we have a bond issue currently outstanding that has 25 years left to maturity
Suppose we have a bond issue currently outstanding that has 25 years left to maturity. The
coupon rate is 9% and coupons are paid semiannually. The bond is currently selling for
$908.72 per $1,000 bond. What is the cost of debt?
A.
5.0%
B.
9.0%
C.
10.0%
D.
11.5%
E.
none of the abov
Expert Solution
Computation of Cost of Debt using Rate Function in Excel:
=rate(nper,pmt,-pv,fv)*2
Here,
Rate = Cost of Debt = ?
Nper = Number of Periods to Maturity = 25 years*2 = 50 Periods
PMT = Semiannual Coupon Payment = $1,000*9%/2 = $45
PV = Current Selling Price = $908.72
FV = Face Value = $1,000
Substituting the values in formula:
=rate(50,45,-908.72,1000)*2
Rate or Cost of Debt = 10%
So, the correct option is C "10%".
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