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Hi,
Does anyone have trouble when calculating the cost of debt for convertible bonds to do with the discount factor you use? For the below example the question I have the answer uses 6% and 8% and they get 7.1% using the linear method. But when I use 5% and 10% for the below I get 7.3% using the exact same method. When I use the same percentages as the answer I get the same as them so my method is correct.
100 current market value
9% for 10 years
10% premium when redeemedthanks for any help 🙂
David
If you had watched my free lectures then you would know that the relationship between the interest rate and the NPV is not linear, and therefore the IRR is only ever an approximation.
Using different guesses will give slightly different answers, but you will still get full marks if you have done the calculation correctly.
I do suggest that you watch the lectures – they are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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