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HB Co has in issue 10% irredeemable loan notes, currently traded at 95% cum-interest.
If the tax rate changes from 30% to 20% for the company, the cost of irredeemable debt:
A Increases to 9.4%
B Increases to 8.4%
C Decreases to 9.4%
D Decreases to 8.4%Please can you explian to me how to get the Market price of the bond as i cannot understand the concept of cum interest and how it deterimne the price of the bond
Thanks A lot
The market value is the present value of the future receipts discounted at the investors required rate of return.
If it is cum int, then there is interest about to be received and so the MV will be higher than the ex int value by the amount of the interest.
You should watch the free lecture on this where it is explained in detail.
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