"Viserion, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 15 years to maturity that is quoted at 106 percent of face value. The issue makes semiannual payments and has an embedded cost of 7 percent annually. What is the company's pretax cost of debt?"

6.37 %

Explanation:

Debt in this case is represented by Bonds. The yield to maturity of a bond is the cost of debt. Yield to maturity is the interest rate used to determine Present Value of Coupons and Principle amount.

Most bond prices are expressed per $1,000. Therefore we will use this as the Face Value.

Pretax cost of debt calculation :

FV = $1,000

PV = $1,000 x 106 % = - $1,060

PMT = ($1,000 x 7 %) ÷ 2 = $35

N = 15 x 2 = 30

P/YR = 2  

I/YR = ??

Using a financial calculator, the yield to maturity of the bond and hence the pretax cost of debt (i/yr) is 6.37 %

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