Spartans has 6.5 percent bonds outstanding that mature in 18 years. The bonds pay interest semiannually and have a face value of $1,000. Currently, the bonds are selling for $985 each. What is the firm's pretax cost of debt

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%

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