How much should cost of debt be?
Hi All,
Kind of a dumb question here.
Why, in the current interest rate environment, where Kd should be very high, are companies like L'Oreal able to finance with bonds by paying a coupon of 0.375%? I have always thought that if the firm has a bond, its Kd should be the weighted average interest paid on the bonds (not 100% correct, but should be a good proxy) , but isn't it an extremely low Cost of debt (even for an AA-rated) ??
I thought that it might be bc the bond is issued at a big discount and, therefore, the yield should be used as a better measure, but I see (https://www.boerse-frankfurt.de/bond/fr0014009ej8…) that all of L'oreal bonds have been issued close to par.
I feel like there's a very easy response to what should seem like a dumb question, but any clarification would be much appreciated.
Cheers,
Just go on Bloomberg and search their bonds - use the blended/ weighted YTM. They may have been issued at par in a different rate environment and now trading at a discount.
Yes. Cost of debt should be weighted average of the company's outstanding issues, if any. If the company doesn't have any debt, you can look at similar comps in the space and look at credit stats based on the PF leverage.
Coupon rate doesn't equal YTM unless the notes are trading at par. Given market rate for similar notes is definitely not under 100bps, L'Oréal notes likely trade a steep discount. You always used YTM, not coupon rate (nominal yield)
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