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Dear sir,
Where a debt is redeemable at its current market price, why we do not calculate the IRR?
I think its a silly question but your comments are helping me alot.For example,
A redeemable loan note trading at $100 with a coupon rate of 5%, due to be redeemed at $100 in 3 years.When I calculate the IRR it comes to 7.95% and it was giving ZERO NPV. But in Kaplan book it was written that the cost of debt is 5% and not 7.95% as they solved using 5% in calculating the market price and I am confused as to why ? The Market price was $ 100 by using 5%.
Thanks,
I don’t know how you arrived at 7.95%.
If debt is irredeemable, then the cost of debt is interest/market value.
If debt it redeemable, then all that makes the cost of debt different is when the debt is repaid at a premium – the extra makes the cost a bit greater (and therefore we need the IRR).
If the debt is redeemable at par (i.e. at $100), then there is nothing extra on redemption and so the cost remains at just the interest/market value.
I hope that makes sense, and helps.
Salman please explain it in dept in a easy way… when we calculate IRR and why??and explain cost of debt redeemable differs from irremediable debt?
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