Redeemable debt
The value of a simple redeemable bond is the present value of its future interest and redemption payments, discounted at the investor's required return for comparable risk. The issuer's after-tax cost is the rate equating the relevant market value or net issue proceeds with after-tax financing payments, using the appropriate purpose and tax assumptions. Coupon yield alone omits any gain or loss between current value and redemption. Check repayment premiums, payment frequency and whether quotes are ex-interest. A market price below par generally raises yield above coupon for an otherwise ordinary bond.
Worked example
A bond pays $6 in one year and $106 in two years including redemption. At a required return of 8%, value is $6/1.08 + $106/1.08² = approximately $96.43 per $100 nominal.
Common mistake
Valuing redeemable debt as a perpetuity, which ignores the principal repayment and finite term.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |