OT Homework Help Save & Exit 4 Too Young, Inc

Finance Dec 01, 2020

OT Homework Help Save & Exit 4 Too Young, Inc. has a bond outstanding with a coupon rate of 6.6 percent and semiannun payments. The band currently sets for $947 and matures in 23 years The par value is $1.000. What is the company's preta cost of debt

Expert Solution

No of periods = 23 years * 2 = 46 semi-annual periods

Coupon per period = (Coupon rate / No of coupon payments per year) * Par value

Coupon per period = (6.6% / 2) * $1000

Coupon per period = $33

Bond Price = $\sum$ Coupon / (1 + YTM / 2)^period + Par value / (1 + YTM / 2)^period

$947 = $33 / (1 + YTM / 2)¹ + $33 / (1 + YTM / 2)² + ...+ $33 / (1 + YTM / 2)⁴⁶ + $1000 / (1 + YTM / 2)⁴⁶

Using Texas Instruments BA 2 plus calculator

SET N = 46, PV = -947, FV = 1000, PMT = 33

CPT --> I/Y = 3.534863%

YTM = 2 * I/Y

YTM = 2 * 3.534863%

Yield to Maturity (YTM) = 7.069725% or 7.07%

Pre-Tax cost of debt = 7.07%

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