The effective interest rate a company pays on its borrowed funds, typically calculated as the yield to maturity on existing debt or the rate on new borrowings. It represents the price of debt financing for the company.
A straightforward concept that became more sophisticated with the development of modern bond markets in the 20th century. The calculation evolved to include not just nominal interest rates but also the tax benefits of debt, leading to the after-tax cost of debt measure.
Cost of debt is the only financing cost that comes with a government subsidy - the tax deductibility of interest payments! This means Uncle Sam effectively pays part of your borrowing costs, making debt artificially cheaper than equity and explaining why companies love leverage (until they don't).
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