The approximate beforetax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at$1,150 is
A) 9 percent.
B) 8.8 percent.
C) 7 percent.
D) 8.3 percent.

Question

Quizplus · Accepted Answer

The before-tax cost of debt is the yield to maturity (YTM) on the bond. Since the bond is selling at a premium ($1,150), the YTM will be less than the coupon rate of 8%. Calculating the YTM for this bond gives approximately 7%.

The Approximate Beforetax Cost of Debt for a 10-Year, 8