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COST OF REDEEMABLE DEBT

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › COST OF REDEEMABLE DEBT

  • This topic has 1 reply, 2 voices, and was last updated 9 years ago by John Moffat.
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  • February 25, 2016 at 12:47 pm #302021
    tinaboy
    Member
    • Topics: 27
    • Replies: 126
    • ☆☆

    Hie John,

    so to calculate the cost of redeemable debt , we always calculate IRR isnt it?what is more interesting is when the holders of bonds are keen to convert.Is it correct that if the conversion value of the bond is greater than it`s nominal value , we use this conversion to calculate the cost of debt instead of the nominal value. For example , the market value of 8% convertible bond is $82 per $100 nominal.given than the bond can be converted into 25 shares of $3.50 each currently and this shre price is expected to grow at 3% pa, the conversion value is $101.44[CV=Po(1+g)nR] note that n is a power.So in year five, instead of suing the traditional $100 nominal at redemption, we simply use $101.44 conversion value to calculate the internal rate of return which is the cost of redeemable debt?May you please correct me if i confused this principle.

    February 25, 2016 at 7:43 pm #302063
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54702
    • ☆☆☆☆☆

    What you have written is correct.

    However this is all explained anyway in our free lectures 🙂

    (Our lectures cover everything needed to be able to pass the exam well!)

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