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Hi, for sample answer “Appendix 4: Value of unsecured bond”, the annual interest calculation uses the interest rate of 13%, whilst the annuity factor and discount factor use the interest rate of 7%. Please may I know why the annual interest calculation does not follow the 7%, but uses 13% instead?
Thank you.
The coupon rate of the new bonds is 13% as per the question.
They are unquoted and so the market value is the PV of the future payments discounted at the investors required rate of return. Given that the normal borrowing rate is 7% it has been assumed that this will apply to the new bonds also,
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