The firm’s unadjusted cost of debt financing equals the yield to maturity (YTM) on new debt, either a long-term bank loan or a bond issue. The yield to maturity represents the effective annual rate or cost to the firm of borrowing funds in the current market environment. Coupon rates from previously issued bonds reveal little about the firm’s present financing costs. The firm’s current financing costs determine its current cost of capital. A firm can determine its cost of debt by several methods. If the firm targets an ‘‘A’’ rating (or any other bond rating), a review of the yields to maturity on A-rated bonds can provide an estimate of the firm’s current unadjusted borrowing costs. Several additional factors will affect the firm’s specific borrowing costs, including convenants and features of the proposed bond issue as well as the number of years until the bond or loan matures or comes due. It is important to examine bonds whose ratings and characteristics resemble those the firm wants to match. In addition, the firm can solicit the advice of investment bankers on the cost of issuing new debt. Or, if the firm has debt currently trading, it can use public market prices and yields to estimate its current cost of debt. The publicly traded bond’s yield to maturity can be found using the techniques for determining the return on an investment. Finally, a firm can seek long-term debt financing from a bank or a consortium of banks. Preliminary discussions with the bankers will indicate a ballpark interest rate the firm can expect to pay on the amount it borrows. [For calculation of YTM see Yield to maturity]