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hello Sir,
how does the cost of debt affect the market value of the bond
in answer to part b there is a formula given P= i / ( 1 + Kd )
and written that as the cost of debt increases , the pv of interest payment decreases and as does the mv of the bond
i dont get thatThe market value of a bond is the present value of the future receipts to the investor discounted at the investors required rate of return.
Whenever we are discounting anything, the greater the discount rate then the lower the present value.
So…..with higher required returns the market value (i.e. the present value) will decrease.
(The examiners answer does not quote a formula in the answer to part (b) – there is no need to quote a formula for part (b) )
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