I came across a question in BPP study text :
“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.”
Solution:
“If interest is 12% annually, therefore 6% is payable half-yearly.
Cost of loan capital = (1+6/95)^2 -1 = 13.0%
Please help me with this as i don;t get why the 1s are. And also please let me know how the calculations would be if it is paid, say, quarterly or every 4 months and also if interest is paid every 2 years (which might be rare).
Ask the Tutor ACCA FM
Cost of Irredeemable debt
8y ago#1To the best of my memory, this has never been asked in the exam (interest has always been annual).
If it is asked, then the half yearly interest is 6/95. To turn this into a yearly effective rate, then 1 + the yearly rate = (1 + half-yearly rate)^2
(For a full explanation as to why, watch the Paper F2 lectures on interest).
If it was payable quarterly, then 1 + yearly rate = (1 + quarterly rate)^4.
Paying it every 2 years will never ever happen in the exam!!
Sign in to reply to this topic.