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Hello Sir,
Would you be able to be explain how they arrived at the 29.1% gain on the bond offer. The working is very confusing. Is there an easier way to calculate this?? If Iam correct I realise he is using the IRR to calculate the yield?
Thank you
Although the examiner could have showed his workings differently, I am afraid that there isn’t an easier way.
First we need to calculate the return to investors on the existing bonds – we do this by calculating the IRR of the receipts to the investors.
We do this because we need to place a value on the new bonds that would be issued – we assume that the investors required return will be the same, and so the MV of the new bonds will be the present value of receipts to investors discounted at the rate calculated above.
Once we know the value of the new bonds, then I think the rest of the calculation should be clear (but ask again if not).
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