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%
The cost of debt is the rate of interest that is effective for the company to determine the rate of interest to be paid on the long-term debts obligations. It is the minimum rate that is expected to be paid by the borrower.
The pre-tax cost of debt is 3.32% for semi-annual payments, and 6.64% for yearly payments.
Computation:
Given,
Maturity period =18 years
The value of N (number of the payment period): It is paid twice a year = 36 [tex](18\;\rm{years}\times2)[/tex]
Face Value or the Future value =$1,000
Selling Price or Present value =$985
Interest rate =6.5%
Now based upon the interest rate of the bond, the per month payment of coupon amount will be determined (PMT):
[tex]\begin{aligned}\rm{PMT}&=\dfrac{\rm{Interest\;Rate}}{2}\times\;\rm{Face\;Value}\\\\&=\dfrac{0.065}{2}\times\$1,000\\\\&=\$32.50\end{aligned}[/tex]
Now based upon the given and determined figures the yield to maturity or the pre-tax cost of debt is computed by using the online finance calculator.
The image is attached below to show the inputs of the calculator for determining the effective rate of return.
To know more about the cost of debt, refer to the link:
https://brainly.com/question/25651634
