Question

Hydro Systems has bonds outstanding with a face value of $1,000, 13 years to maturity, and a coupon rate of 6.5 percent, paid annually. What is the company's pretax cost of debt if the bonds currently sell for $1,056?
a. 5.87 percent
b. 6.42 percent
c. 4.71 percent
d. 5.36 percent
e. 5.55 percent

Answer 1

Answer:

a. 5.87 percent

Explanation:

Annual coupon = 1000*6.5%  = $65

Yield to maturity = [Annual coupon + (Face value-Present value)/time to maturity] / (Face value+Present value)/2

Yield to maturity = [65 + (1000-1,056)/13] / (1000+1,056) / 2

Yield to maturity = [65 + (-56/13)] / 2056/2 ]

Yield to maturity =  {65 - 4.31] / 1028

Yield to maturity = 60.69 / 1028

Yield to maturity = 0.0590369649805447

Yield to maturity = 5.90%