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Part b asks for an estimate of the revised market valuation of the companys debt
Why the have use the 4 % coupon rate instead of directly using 6 % coupon rate.and after using coupon rate of 4 % , the yield is 4.4 %
and the solution to that above is $98.90
for $100 nominal it has fallen to $98.90 – i,e, a reduction of $1.10Why the examiner shows $98.90 as percentage and took it of $400 million par value and arriving at $395.50 million.
I have wasted hours in order to understand this solution , it is way different.
There is nothing different about the question – it is really Paper PM (old Paper F9). It is the answer that is confusing – this was the previous examiner and many of his questions and/or answers were dreadful.
You will know from Paper FM that the MV of debt is the PV of future receipts discounted at the required yield.
So currently, on $100 nominal, the receipts are interest of $4 per year for 3 years and redemption of $100 in 3 years time.
The current required yield is 3.5% + 0.5% = 4%.
If you discount the receipts at 4% you will get a current MV of $100.In future, the receipts will still be interest of $4 per year for 3 years and redemption of $100 in 3 years time.
The yield will change to 3.5% + 0.90% = 4.4% (the credit rating changes so investors will require a higher yield).
If you discount the receipts at 4.4% you will get a new MV of $98.9.I covered this P4 course with using F9 notes as well which is relevant to P4 , which i wrote 4 years ago , F9 you made it so interesting and P4 too , P4 case scenario looks little bit scary to me , i don’t know what will happen on exam day , took one month leave from an office to practice questions and to pass this subject.
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