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The formula MV = Int/ Kd
Sir, in simple terms what are the difference between required rate of return and interest .
Because it’s really interesting if I borrow money and I am suppose to pay interest and the principal sum as at when due in the case of loan or capital given by investor. So why demanding an extra rate of return from this investor ?
The coupon rate (the interest rate on nominal) will be fixed when the debt is issued. However, the rate of return required by investors changes over time – they may want a higher return or they may be happy with a lower return. It is the rate of return that investors currently require that determines the current market value of the debt.
I do explain all of this in my free lectures. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
(Incidentally, the formula you quote only applies to irredeemable debt. In the exam debt is more likely to be redeemable in which case we need to calculate the IRR).
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