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topjm [15]
3 years ago
5

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
Business
1 answer:
Leya [2.2K]3 years ago
7 0

Answer:

A) 5.22 percent

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%

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