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Dear Sir ,
I have been meet some question that required to calculate the cost of debt for the redeemable debt that have already been issued , however the question required using the current market price not the market price when the debt first issue . Here is mine question , in the cost of debt assumption , we assume the market price(at the time of the issue) is equal to the present value of the future interest and the redemption amount and the discount rate will be the cost of debt ( Kd) , so what is the point to use the current market price ?
We are trying to estimate the cost of raising more debt. The cost of debt depends on the return that debt investors are currently requiring.
To do this we look at what return they are currently requiring on the existing debt.
Given that the market value of the existing debt is the PV of future receipts discounting at the investors currently required rate of return, we work backwards to find out what it is (i.e. calculating the IRR).This is always asked in the exam.
I suggest that you watch my free lectures on this, where I explain in detail – with examples.
The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
thanks for your reply , i want to make the concpet more clearly , lets say the bond have been issued have a current market price $110( ex interest) per $100 nominal value , when the bond first issue to the public , the company promised will pay 10% interest on the nominal value for 10 years , also in the last year the bond will be redeem with nominal value . However , the company already paid the interest for the first 3 years .
so when we workup the cost of debt , is the cash flows in the calculation will only have the rest of the interest receivable (the next 7 years interest ) and the redemption amount right ?
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