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I got a question in exam similar to this ‘built up’ one:
Bond A will be redeemed at nominal in ten years’ time and pays 6 months interest of 9%. The cost of debt of this bond is 9·83% per year. The current ex interest market price of the bond is $95·08.
How to proceed with the workings? can you help?
I convert the 6 mnths interest in 1 year OR make the cost of debt per half yearWhy have you headed up this post “Foreign currency risk” given that it is nothing to do with foreign currency?
I do not know which exam you are referring to, but the real exam does not ask for six-monthly discounting.
In the example you have typed out, we are told the cost of debt and we are told the market value. So there is nothing to be calculated!!
If you had been asked to calculate the market value (and assuming that the interest is 9% p.a. and that there is no tax) then you would need to use the annuity factor formula provided, for 20 periods with interest at 4.5% period in order to discount the interest payments, and calculate the 20 period present value factor with interest at 4.5% per period in order to discount the $100 redemption.
(Obviously if it were to appear in a Section C question then you could use the PV function in the spreadsheet provided.)
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