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I know it is not being asked in the exam (as you said in the lecture) but I was curious that how would we calculate interest yield on this on premium.
For eg:
If 8% Bond 2020 – repayable at a premium of 10% are currently quoted at 80We know that we will be getting $8 interest p.a. BUT we also get $110 premium at the repayment date. So what is the overall return to investors?
I hope you would not mind answering this question. Thanks for your time 🙂
The interest yield ignore the redemption and is 8/80 = 10%.
The redemption yield is the overall return taking into account both the interest and the redemption and is the IRR of the flows.
——————————-Time—–Cashflows—–DF (10%)—-PV——-DF (15%)——PV
Market Value—————-0———–(80)———–1————-(80)——–1—————(80)
Interest Paid————–1 – 10———8———–6.145———-49——-5.019————40
Redeem at Premium—–10———-110———0.386———–42——-0.247————27NPV———————————————————————–12————————-(13)
Cost of Debt calculated through IRR = 12.4%
Is this correct?
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