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Co has $660k of 8% Bonds which interest is payable annually on 31st Dec. Debt due from redemption at par on 1 Jan 2006. Market Price of Bonds is $95 at 28 Dec 2002. Ignore Tax what is current cost of Debt?
Answer Extract (I have used exact IRR)
Item Date YR CF D.Fact 10% PV
M.V 28 Dec 2002 0 (95) 1 (95)
Interest 31 Dec 2003 1 8 0.909 7.3
Interest 31 Dec 2004 2
etcMY QUESTION
Why is Interest line not shown for 31 Dec 2002 when calculating NPV??sorry I had spaced it all out and now its all mashed up, The point was that only the Interest from 31st Dec 2003 for 3 years to 31 Dec 2005 used. Why not 31 Dec 2002? As in a separate sub question it then asks you what would happen to Market Price if Cost of Debt rose to 12% and in that you combine 4 years Interest + Redemption?
A wee bit lost?
Market values in the exam all always given ex int (i.e. assuming the current interest has just been paid) unless specifically told differently.
There are 4 years of interest – 31 Dec 2003, 2004, 2005 and 2006 (and then the redemption on 31 Dec 2006).
I do suggest that you watch my free lectures on this. The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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