COST OF DEBT

Th examiner is normally seeking to test your understanding of the nature of two types of TRADED debt (1) Redeemable and (2) Irredeemable.

(1) To calculate the cost of redeemable debt after tax (KDAT) you need to find the IRR of the debt, using inter-polation.

(2) To calculate the cost of irredeemable debt you treat the interest on the debt as a PERPETUITY and so calculate the cost of the debt using the formula

CI(1-t)/current market price P.U. of the debt
Where: CI = Coupon Interest Rate

There is very good coverage of this area of the syllabus within the OT Lecture Notes + OT videos etc., and I suggest you look closely at these resources to better your understanding of this important area.

Hope this helps, Peter