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How to calculate the cost of redeemable debt, Kd and the YTM (yield to maturity) using the following information?
(Par value: 100
Coupon rate: 7%
Duration : 4 years
Market value: 97In future you must ask in the Ask the Tutor Forum if you want me to answer. This forum is for students to help each other.
The YTM is the IRR of the flows to the investor.
0 (97)
1-4. 7 p.a.
4 100 (assuming that the debt is redeemable at par – an exam question would tell you whether or not this was the case).The cost of debt is the IRR of the cash flows after tax relief on the interest. An exam question would tell you what the rate of company tax was.
All of this is explained in my free lectures on the cost of capital (and is revision from Paper FM also).
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