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Hi Sir,
I am struggling to understand how to calculate the market value of 8% bonds redeemable in 5-years at premium of 10%.
Could you run through the correct workings to reach answer $364,840 please?
Thanks in advance,
LynneThe market value is the PV of the future receipts discounted at the investors required rate of return.
For every $100 nominal, the future receipts are:
1 to 5 $8 per annum
5 $110Since you have not said the investors required rate of return and nor have you said the total nominal value of the bonds, it is impossible for me to do any more of the workings!
Thank you. I can follow the remaining workings. So tax is ignored in this instance?
Tax is always ignored when calculating the market value because it is the investors who fix the market value and they receive the full interest.
If it only when calculating the cost of debt that tax is relevant because the company gets tax relief on the interest.
Thank you Sir.
Your lectures, these mock questions and your constant feedback on the forums is very helpful indeed.
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