Handy Man, Inc., has zero coupon bonds outstanding that mature in eight years. The bonds have a face value of $1,000 and a curre

Question

1 month ago

15

nt market price of $640. What is the pretax cost of debt? (Use semiannual compounding.)

1 answer:

Nady [3.6K] · Answer 1 · 2026-04-11T01:59:00+03:00

Answer:

5.657%

Explanation:

Given data:

Face value = $1,000

Current price = $640

Maturity period, t = 8 years

Now,

the compounding formula is expressed as:

Face value = Present value × $(1+\frac{r}{n})^{nt}$

where,

r denotes the rate, which is the pretax debt rate

n signifies the frequency of interest compounding, which for semiannual compounding is n = 2

hence, when plugging in the values, we obtain

$ 1,000= $ 640 × $(1+\frac{r}{2})^{2\times8}$

or

1.5625 = $(1+\frac{r}{2})^{16}$

or

$(1+\frac{r}{2})$ = 1.0282

or

r = 0.05657

therefore, the pretax cost of debt is calculated as 0.05657 × 100% = 5.657%