Answer:
The answer is 6.64%
Explanation:
The coupon payment is semiannual, meaning it is being paid twice a year.
N(Number of years/Number of periods) = 36(18 years x 2)
I/Y(Yield-To-Maturity) = ?
PMT(coupon payment) = $32.5 [(6.5%/2) x $1,000]
FV(Future value/Par value) =$1,000
PV(present value or market value) = $985
Now to solve this, lets use a financial calculator (e.g Texas BA II plus)
N= 36; PV = -985; PMT = $32.5; FV = $1,000; CPT I/Y = 3.32%
3.32% is for semiannual. Therefore annual pretax cost of debt is 6.64%
