Question

If a firm has bonds outstanding and the firm would like to calculate the current cost of debt for the bonds, then the firm would

A) use the coupon rate of the bonds to estimate the cost.
B) use the current yield to maturity of the bonds to estimate the cost.
C) use the current coupon yield of the bonds to estimate the cost.
D) none of the above.

Answer 1

To calculate the current cost of debt for outstanding bonds, a firm should use the yield to maturity, which reflects the present value of the bond based on current market conditions.

Step-by-step explanation:

If a firm has bonds outstanding and would like to calculate the current cost of debt for these bonds, the firm should use the current yield to maturity of the bonds to estimate the cost. The coupon rate is the original interest rate the bond was issued with and may not reflect current market conditions. The yield to maturity (YTM) considers the current market price, the coupon payments, and the time remaining until maturity to give an accurate measure of the return if the bond is held to maturity.