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.

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?

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 !

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.

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?

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dferns says

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.

dferns says

I got my answer. Please ignore my Q. Ta

John Moffat says

I am glad you got the answer 馃檪

Mahrukh says

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?

John Moffat says

Yes, your understanding is correct.

Mahrukh says

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

John Moffat says

Yes it is.

Mahrukh says

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

Mahrukh says

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

jaidev says

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 !

John Moffat says

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.

Mahrukh says

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

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

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?

msk29 says

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.

Yomi says

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

John Moffat says

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.