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Cost of capital

6.2 Comparison of cost of debt and yield to maturity

The cost of debt and the yield to maturity are very similar
calculations. It is important to understand the main differences so
mistakes are not made.

Cost of debt (k d) Yield to maturity (YTM)

Who is it relevant to? Entities applying for Providers of debt finance
finance (investors)

Interest Net of tax = i(1–T) Gross of tax

Interest creates a tax
deduction which is
incorporated into k d
Irredeemable i
i(1–T)
–––– ––––
Pₒ Pₒ

Redeemable IRR IRR

Interest cash flows net of Interest cash flows gross
tax of tax

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