Cost of Debt

Unless you're getting a loan from your mom, you're probably going to have to pay some interest. That's the way banks and bond investors make money. They give you the use of some of their cash for a period of time, and you pay them a little extra for the privilege.

From your point of view, the amount you pay in interest is the cost of debt. You borrow $100,000 at 10% a year. That means you have to pay $10,000 in interest, on top of principle you have to return. That $10,000 a year is your cost of debt.

One piece of good news: interest is generally deductible from taxes. As such, the cost of debt is usually figured on an after-tax basis.