Cost of debt using the approximation formula


For each of the following $1,000-par-value bonds, assuming annual interest payment and a 40% tax rate, calculate the after-tax cost to maturity using the approximation formula.

Bond Life Underwriting fee Discount (-) or premium (+) Coupon interest rate

A 20 $25 -$20 9%

B 16 40 +10 10

C 15 30 -15 12

D 25 15 Par 9

E 22 20 -60 11

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Finance Basics: Cost of debt using the approximation formula
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