Question

AMD 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

Answer 1

Answer: 5.90%

Explanation:

The pre-tax cost of debt refers to the yield on the bonds.

The Yield is calculated by the formula:

= (Annual coupon + (Face value - Present value) / Periods till maturity) ÷ ((Face value + Present value)/2)

Annual coupon = 6.5% * 1,000 = $65

Yield is:

= (65 + (1,000 - 1,056) / 13) ÷ ((1,000 + 1,056) / 2)

= 5.90%