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There is a question 4.4 in the BPP book, page 271: Henryted has 12% irredeemable bonds in issue with a nominal value of $100. The market price is $95 ex interest. Calculate the cost of capital if interest is paid half-yearly.
Answer: If interest is 12% annually, therefore 6% is payable half-yearly.
Cost of loan capital = (1+(6/95) )²-1 = 13%
I can’t work out why it’s been calculated this way if the formula for irredeemable debt is Kd=i/Po ? Where do the 1s come from and the square root?
Is there anyone who would be able to help?
Many thanks,
Ewa- Topics: 0
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it still using the SAME formula kd=i/P0
for half year : kd=6/95
but for FULL year, it need something like the compound interest stuff as in the old school day, i.e, (1+year_rate/n)^n
in this case, n=2, year_rate=12%
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