Effective Cost of Debt

[Trickster]

A firm had issued a bond 3 years ago with semiannual payments for 8 years. The coupon rate was 10%. These bonds are treated at a price of $1,201 now. What is the Effective cost of debt for this firm before taxes?


The way I calculated this problem was:

N = (8-3) x 2 payments left
PMT= 0.10 x 1000/2 = 50
FV = 1000
PV = -1201
CPT I/Y= 2.68 x 2 = 5.36
EAR = (1+2.68)2-1 = <---- now once I get to this part the answer is supposed to be "5.4318% or 5.43% " (which is one of the selections in the answer key) but when I calculate this portion I either come out with 5.36 or when I calculate this problem as (1+2.68)^2 - 1 = by powering it to by 2 ....I get 12.5424


so my question is, is 12.5424 taken as 5.43% (rounded sort of ) as shown in the answer key or am I completely off base with this problem? Please help!

 

[Trickster]

Should be (1 + .0268)^2 - 1 which equals .05431824
Multiply by 100 to get percentage rate of ~5.43%

Is this problem from your teacher or from a book?

Hey, thanks for answering. The question is from my teacher it was on his Sample Final Exam Sheet.

 

[stapel]

Hey, thanks for answering. The question is from my teacher it was on his Sample Final Exam Sheet.

Okay. Now, what work have you done, starting from what the other helper gave you? How far have you gotten? Where are you stuck?

Please be complete. Thank you!

 

[Trickster]

Okay. Now, what work have you done, starting from what the other helper gave you? How far have you gotten? Where are you stuck?

Please be complete. Thank you!

Yes. I've completely figured out how to answer the question from the reply Denis made. I only had a problem with that portion of the problem so that's it.