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Hello,
Tutor, can you please explain, after incurring issue cost (compound instrument) why does the ”effective rate of interest” increases?
5 year bond, does not pay interest.
Issued at 100 and redeemed at 120. Finance cost of 20 must be spread over 5 years.
BUT if issue costs were 5, bond would effectively be issued at 95 (company receives 100 but has to give 5 to arranging bank). So now 25 finance cost must be spread over 5 years. SO IRR WILL BE HIGHER.
Would it be fine if I say I didn’t get it clearly? Can you please rephrase it a bit?
Please watch the following (FR not SBR):
Then come back to me if you need to.
🙂
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