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1) Please correct me that interest yield is a return based on their investment if somebody buying this from the stock exchange and it ignores the redemption of the debt and it is calculated through this formula (interest / MV of debt) = %.
[Therefore we use it for irredeemable debt because we believe that interest is paid in perpetuity (i.e. forever)]
However, redemption yield is the overall return (i.e. return to investors) taking into account both the interest and the redemption on maturity and is the IRR of the cashflows.
[Therefore use it for redeemable debt because we will redeem the debt on maturity]
2) Sir you explained in your lecture that interest yield is the return to investors for lending their money to the company but is it correct that as the market value changes the return to investors changes. BUT the company is indifferent to whatever happens to the market value of the debt because they had already the money raised from debtholders. So why did the market value changes then and why the company should be concerned?
These really confused me please explain….
What you have written is correct.
The market value of the debt changes because the rate of return required by investors changes. This does not affect the company but changes the price at which investors buy and sell debt to/from each other.
The company is not really concerned about the MV of debt. What they are concerned about is the MV of equity because it is important to keep shareholders ‘happy’ and also if they want to raise new money in the future it will be harder if the MV of the existing shares has been falling.
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