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The valuation of debt finance, and duration (part 1) – ACCA (AFM) lectures


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Comments

  1. dante1825 says

    February 27, 2022 at 12:02 am

    Hello Sir,

    Thank you for the lecture, your explanations were spot on!

    I have only one doubt, regarding one point you made regarding the MV of bonds falling after we have bought them. Since the interest and the face value is fixed when we buy them at the current market price, why do we care if the MV falls in the future? Is it because we might want to sell them before their maturity date? This is the only logical explanation I can think of at the moment!

    Thank you!
    Georgios

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    • John Moffat says

      February 27, 2022 at 10:14 am

      It will affect how easy or difficult it will be to raise future finance.

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      • dante1825 says

        February 27, 2022 at 9:17 pm

        Thank you

      • John Moffat says

        February 28, 2022 at 8:09 am

        You are welcome.

  2. nadiahussain86 says

    November 17, 2020 at 12:23 am

    Hello,

    I have a quick question regarding example 3.

    You mentioned we could by all means use the annuity but you did it year by year. Slightly confused as to when we can just use the annuity as oppose to the year by year d.f. (additionally if using the annuity is much quicker why would we use the d.f year by year)

    Thank you!

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    • John Moffat says

      November 17, 2020 at 8:53 am

      I only did it because when we come to examples 4 and 5 (which use the same flows) then we do need the separate PV’s.

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    • nadiahussain86 says

      November 17, 2020 at 7:39 pm

      Thank you

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      • John Moffat says

        November 18, 2020 at 8:31 am

        You are welcome 馃檪

  3. mehrfatima says

    October 23, 2020 at 3:13 am

    Hello Sir, (This might sound a little silly, but) Why is this sensitivity important to the investor? The said investor will be getting a fixed return and the redemption rate is fixed and known. How would the changes in the MV or its sensitivity effect them– Is it if they decide to sell the bond to a third party before the duration or is it just a notional consideration?

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    • John Moffat says

      October 23, 2020 at 8:00 am

      Yes – it is simply a measure as to how much the value of their investment is likely to change over time.

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  4. dferns says

    January 23, 2020 at 8:08 am

    Hello,
    Please can you let me know why in example 1 the redemption in year 5 is $118 and in example 2 its $110 (and not $118)?
    Thank you very much for your help on this. Much appreciate.

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    • dferns says

      January 23, 2020 at 11:35 am

      I got my answer. Please ignore my Q. Ta

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      • John Moffat says

        January 23, 2020 at 5:51 pm

        I am glad you got the answer 馃檪

  5. Mahrukh says

    October 2, 2019 at 9:26 pm

    Hello sir,
    Practically the yield, i.e. return required by investors would be higher for longer term of investment. In the example its just theoratically the same return for both bonds, but practically investor would require a higher return for the ten year bond, given the concept of yield curve. Is my understanding correct?

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    • John Moffat says

      October 3, 2019 at 7:25 am

      Yes, your understanding is correct.

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      • Mahrukh says

        October 3, 2019 at 5:50 pm

        Is it possible that bonds having same time period & yields, have different durations?

      • John Moffat says

        October 4, 2019 at 8:26 am

        Yes it is.

      • Mahrukh says

        October 4, 2019 at 7:00 pm

        I thought the only factor causing different durations was time period. How else it is possible?

      • Mahrukh says

        October 9, 2019 at 10:19 am

        Sir, how is it possible. Can you give any example so that it’ll be easy to understand?

  6. jaidev says

    July 5, 2019 at 7:27 am

    Hello sir ,
    Thank you for the fantastic explanation , it’s really helpful !
    I have one doubt though –
    In example 2 , you mentioned that corporate tax is irrelevant as our concern is investors required rate and not the cost to company , which i completely understand .

    But , how would the answer be different if we were asked to calculate the cost to company for the same question and if the corporate tax rate was mentioned ? ( Is cost to company = investors required rate – corporate tax ?)
    Thanks !

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    • John Moffat says

      July 5, 2019 at 8:37 am

      The calculation of the cost of debt to the company was all explained in earlier lectures (the lectures on Chapter 6 of the lecture notes).

      If debt is irredeemable then it is return to investors x (1 – T).
      If the debt is redeemable then it is the IRR of the after tax flows.

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      • Mahrukh says

        October 5, 2019 at 12:36 pm

        Sir, the cost of debt should be the IRR of post tax cash flows. But in the answer of march/june 2019 Q3, examiner has directly calculated the cost of debt by multiplying pre-tax cost by (1-T), for a redeemable bond of 5 year maturity, which is then used in the calculation of WACC.

      • John Moffat says

        October 5, 2019 at 1:26 pm

        Yes. Strictly it should be the IRR of the flows, but sometimes the examiner does take a ‘short cut’ in his answers 馃檪

      • Mahrukh says

        October 9, 2019 at 10:18 am

        So we can do it too in the exam? Unless it is specifically a bond valuation question. Like if we have to calculate bond’s value to use in WACC calculation, we can use this shortcut right?

  7. msk29 says

    November 24, 2018 at 4:56 pm

    Hello!

    I have a question from past paper: dec ’09 – Alaska Salvage.

    In part b) it required to determine the coupon rate, where we can work on it by stating it as “x” (unknown figure) to the amounts given.

    My question is why do we have to add the call value in year 0 and what does it mean putting it there?

    Thank you.

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  8. Yomi says

    October 18, 2018 at 6:23 am

    Hello sir, pls why was there no year 0 in the computation to calculate the PV of the bond in example 1

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    • John Moffat says

      October 18, 2018 at 8:11 am

      Time 0 is now. The market value now is the PV of future receipts and the first receipt is in 1 years time – time 1.

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