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A company has in issue loan notes with a nominal value of $100 each. Interest on the loan notes is 6% per year, payable annually. The loan notes will be redeemed in eight years’ time at a 5% premium to nominal value. The before-tax cost of debt of the company is 7% per year.
What is the ex interest market value of each loan note?
A. $94·03
B. $96·94
C. $102·91
D. $103·10
The answer is b which includes interest. Doesn’t ex interest mean excluding interest ?No. Ex-interest values do not include the current years interest. It is cum-interest values that include the current years interest.
I do explain this in my free lectures on the valuation of securities. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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