Answer:
The answer is 8.90%
Explanation:
Solution
Given that:
The bond face value =$1000
Annual coupon rate =10%
Maturity rate =12 years
Price sold at =1080
Now we find the component cost of debt for use
Thus
The debt (cost) = Yield to maturity
So
YTM = Annual interest payment + [(Face value - Present price / Years to maturity] / [0.6(Price of bond) + 0.4 (principal payment)]
= $100 + [($1000 - $1080) / 12] / [0.6 * $1080 + 0.4 * $1000]
= $100 - 6.67 / $1048
= $93.33 / $1048
= 0.0890 or 8.90%
Therefore the debt for use is 8.90%