Contrast the approaches for estimating what debt costs a firm

For traded debt, the yield to maturity on the company's bonds is the most direct estimate of the pre-tax cost. For debt that does not trade, matrix pricing uses yields on liquid bonds with similar ratings and maturities, interpolating between maturities. Where the issuer is unrated, a synthetic rating assigns a rating from ratios such as interest coverage, then adds the matching spread to a government yield. Bank loans, floating-rate debt and leases need their own treatment, for instance current rates on comparable new loans. The after-tax cost is the pre-tax cost × (1 − tax rate). Traps are forgetting the tax adjustment, using a different coverage definition from the rating table, and failing to interpolate.