February 18, 2020 at 8:03 am #562186
Sir i have doubt in part b 1 how the coupon rate required for the new bond is calculated what i read in the article that
Bond price= coupon ×(1+r)-1 + coupon(1+r2)-2………..
In the answer they have used $100 for bond price but shouldnt we use the MV OF THE NEW BOND CALCULATED ie 107.81
February 18, 2020 at 9:18 am #562196
1.Dear john i cannot understand how macaulay duration is calculated based on fixed annual repayments of interst and capital
2. In appendix 3 what is this additional interest payable due to higher coupon and how its been calculated …
And while calculating interest payable on additional borrowing why the coupon rate of 3.57% is used which i still dont know how its calculated? This question is giving me headache ? poor me
February 18, 2020 at 10:20 am #562215
1. $107.81 is the new market value of the existing bond. They are issuing a new bond and the question says that it is being issued at $100.
2. The 3.57% is the coupon rate on the new bond. They are paying fixed interest each year and the PV of the interest payments and redemption must (as always) equal the current MV which is $100. In order to calculate what the interest is each year, the answer has let it be R, and has then set up the equation for the PV of interest and redemption to equal 100, and has then used algebra to calculate what the value of R must be and arrived at $3.57 per year.
February 18, 2020 at 8:47 pm #562318
For $100 they have written it as face value so how is it taken as MARKET VALUE..?
PLease explain how do we get additional interest payable due to higher coupon calculated ie 120m×0.37%×(1-0.15)
From where does 120m come ?
February 19, 2020 at 9:17 am #562357
Because the question says that that is the price at which it is issued – so that is the market value at the date of issue.
The 120M comes from the SOFP given in the question – the non-current liabilities.
February 19, 2020 at 12:05 pm #562386
Okay so why are we using 120m of debt and not 1320 ie the finance raised for reconstruction?
February 19, 2020 at 5:42 pm #562418
But the answer is calculating the interest on both!!!!!
Look at Appendix 3. There is shown the interest paid on the 1,320M and also the extra interest payable on the 120M.
Also, in the forecast SOFP’s is shown the total borrowing of 1,320 + 120 = 1,440.
February 21, 2020 at 5:26 pm #562652
My question is why they have included 120m if ts not included in the reconstruction plan question says that bond covenant states that should conejo co borrowing increase the coupon payable on these bonds will increase by 37 basis points…so its previous borrowing was 120m and new borrowing is 1320 so shouldnt we applying 0.37% to (1320 and not 120m )?
February 22, 2020 at 8:24 am #562696
The current after tax profit will already be after the existing interest on the current bonds, so it only the extra interest on these. It is all the interest on the new bonds.
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