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Dear sir,
What would be the formula for cost of debt of a loan note which is redeemable but the interest payable on it is either half yearly, quarterly or monthly?There is no formula (just as there is no formula when the interest payments are yearly).
You calculate the IRR in the normal way (discounting for the number of periods rather than the number of years. So if it is half-yearly for 5 years, then you use the discount factors for 10 periods).
The IRR is the cost of debt per period. To turn that into a yearly cost of debt you do what we did in Paper MA (was Paper F2), so (for example) if the half-yearly IRR is 4%, then the yearly rate is (1.04^2) – 1 = 0.0816 (or 8.16%).
However the chances of this being relevant for Paper AFM is very remote.
Thanks for your reply. It helped me out nonetheless, even if it is not examinable.
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