YTM | Ch 2

This topic has 1 reply, 2 voices, and was last updated 6 years ago by P2-D2.

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November 23, 2019 at 12:57 pm #553520
abbasisaeed
Participant
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As mentioned in the text, Cost of debt uses post-tax interest expense in the calculation but YTM uses pre-tax interest income in the calculation. Can you please help me understand why is this the case (logical reasoning)?
November 24, 2019 at 10:25 pm #553654
P2-D2
Keymaster
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Hi,

The cost of debt is the cost of debt to the company, whereas the YTM is the return on the bond itself to the individual/holder. The company then saves the tax on this, giving the cost of debt.

Thanks
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