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Chapter 2

3.3 Cost of debt – irredeemable and undated bonds

K d = i(1 – T)
P o
k d = cost of debt

i = interest paid each year (using coupon rate)

T = marginal tax rate

Pₒ = ex int market price of the debt based on $100 par blocks of debt
(ex int = AFTER interest paid)

This formula can also be used for:

 redeemable bonds traded at par

 long dated debt

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