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

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  1. 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!

  2. 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?

  4. 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?

  5. 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 !

    • 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.

      • 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?

  6. 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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