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Forums › ACCA Forums › ACCA AFM Advanced Financial Management Forums › Credit Spread
Sir
for redeemable debt, from your lectures i understand we need to use the IRR. However, re-reading my Kaplan notes, i understand there is another method; using credit spreads (or the default risk premium).
Is this Examinable in AFM?
When calculating the cost of debt, it is the IRR of the after-tax flows.
When calculating the MV of debt, it is the PV of the pre-tax flows. Depending on the information in the question they are either discounted at the YTM or discounted at the spot yield rate as adjusted by the credit spread for each year individually.
It is examinable often and I suggest that you read the following technical article on the ACCA website:
https://www.accaglobal.com/gb/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/bond-valuation-yields.html
amazing
thank you!
You are welcome 🙂