Too Young Incorporated, has a bond outstanding with a coupon rate of 7 percent and semiannual payments. The bond currently sells for $1,898 and matures in 16 years. The par value is $2,000. What is the company's pretax cost of debt?

The pretax cost of debt can be found by determining the yield to maturity (YTM) of the bond. Since the bond pays semiannual interest, we need to approach the YTM calculation by considering the semiannual periods.

### Variables:
- **Coupon rate:** 7% annually or 3.5% semiannually
- **Coupon payment:** $ 2,000 \times 3.5\% = 70 $ per semiannual period
- **Current price of the bond:** \$1,898
- **Par value (Face value):** \$2,000
- **Number of years to maturity:** 16
- **Number of semiannual periods:** $ 16 \times 2 = 32 $

### Formula to Calculate YTM:

The YTM can be approximated using the following equation, where we solve for the semiannual yield ($ r $):

\[
1,898 = \sum_{t=1}^{32} \frac{70}{(1 + r)^t} + \frac{2,000}{(1 + r)^{32}}
\]

To calculate this, we can use a financial calculator or solve iteratively using numerical methods such as trial and error, Excel, or a root-finding algorithm.

Let's proceed to calculate this.The company's pretax cost of debt is approximately **7.55%** annually.

Would you like further details or have any questions? Here are some related questions you might find useful:

1. How does the semiannual coupon payment affect bond calculations?
2. How can you calculate the after-tax cost of debt?
3. What is the difference between coupon rate and yield to maturity?
4. How does a bond's price relate to its yield to maturity?
5. What methods can be used to calculate yield to maturity?

**Tip:** Always annualize the YTM when bonds pay semiannually to ensure you're using the correct rate for comparisons and decisions.

Too Young Incorporated has a bond outstanding with a coupon rate of 7 percent and semiannual payments. The bond currently sells for $1,898 and matures in 16 years. The par value is $2,000. What is the company's pretax cost of debt?

Learn how to calculate the pretax cost of debt for Too Young Incorporated's bond, with a 7% coupon rate, semiannual payments, and 16 years to maturity. This problem covers bond valuation concepts, including yield to maturity and the time value of money. Suitable for finance students.

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