Annual cost of a semi-annual bond

CFA Level I Corporate Finance
#1

Hello everyone, I really don’t understand this in the Qbank : Kd = Solve for i: N = 40, PMT = 50, FV = 1,000, PV = -849.54, CPT I = 6 × 2 = 12%

With a semi-annual bond paying 10%/2, they just multiply the YTM to get the cost per year… Is it correct ? Thank by advance for your time, Coritani

#2

Yes.

Bond Equivalent Yield.

I wrote an article on yield measures that may be of xome help here: http://financialexamhelp123.com/yield-measures-quant/

#3

if we multiply the ESAY by 2, we get the BEY but it is not an effective rate : why in the WACC they use a rate that is not effective ? they should use an “annual YTM”. so the Kd that is found is not the perfect cost of debt

#4

I agree: in the common formulation of WACC we combine effective rates (for equity) with a nominal rate (for debt); they should both be effective rates.

As a practical matter, however, the difference is generally small enough that it’s in the noise.

#5

So i guess i have to remember it without understand very well : it is a standard. But the BEY disturb me a little… If i buy a par bond yielding 5% each 6 months… then EAR = BEY = 10% but if i buy a disount bond, then the equality doest stand anymore. Am i correct ?

#6

Nope: if BEY = 10% then EAR = 10.25%:

1.05² – 1 = 1.1025