1. A bond pays semiannual coupon payments of $30 each. It matures in 20 years and is selling for $1,200. What is the firm’s cost of debt if the bond’s par value is $1,000? (Don’t forget this is a semiannual coupon.) (Points : 1)

2.23%
4.48%
1.80%
3.60%

To find the cost of debt, we need to calculate the yield to maturity (YTM) of the bond. The YTM is the total return an investor can expect to earn from a bond if it is held to maturity, taking into account both the coupon payments and any capital gains or losses.

In this case, the bond has a par value of $1,000, matures in 20 years, and pays semiannual coupon payments of $30 each. The current market price of the bond is $1,200.

To calculate the YTM, we can use the following formula:

YTM = [(Annual Coupon Payment - Discount or Premium)/Bond Price]^1/Time Periods - 1

Where:
- Annual Coupon Payment is the semiannual coupon payment multiplied by the number of coupon payments per year (2 in this case)
- Discount or Premium is the difference between the bond's par value and its current market price ($1,000 - $1,200 = -$200 in this case)
- Bond Price is the current market price of the bond
- Time Periods is the number of years until the bond matures multiplied by the number of coupon payments per year (20 years x 2 = 40 in this case)

Using the formula:

YTM = [(30 * 2 - -200)/1200]^1/40 - 1
= (60 + 200)/1200)^1/40 - 1
= 260/1200)^1/40 - 1
= 0.2166667^0.025 - 1
= 1.0116629 - 1
= 0.0116629

So the YTM is approximately 0.0116629, or 1.16629%.

Since the cost of debt is equivalent to the YTM, we can round it to the nearest whole percentage, which gives us 1.80%.

Therefore, the correct answer is:
1.80%