You are assessing the cost of debt, to use in the cost of capital. The firm has $200 million in bank loans outstanding, carrying an interest rate of 6% and a remaining maturity of 3 years, the loans were taken on a coupe of years ago when interest rates were higher. The current risk-free rate is 3% and you anticipate that your default spread to borrow long term is 2%. What is the pre-tax cost of debt for this firm?

6%

3%

5%

5.5%

None of the above