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Hello its jus a geneal question not specifically related to any kit question.
Gross redemption or yield to maturity is IRR on a bond and that is the yield company offers to the buyers of its to bond and it is effected by the coupan rate on a bond and to decide whether a bond should be issued at a discount or at premium. An investor also look for the present value of future interest and capital payments before buying the bonds which is same IRR of a bond. Why we calculate IRR on a bond to determine the market value of a bond when its an internal rate of return and from investors point of view it may be just one factor before investing in our bonds. I may be confused here could you please elaborateon these issues that why sometimes we just discount the PV of future payments to arrive at the cost of a redeemable debt and sometimes we calculate the IRR. is there no hard and fast rule around this issue ?
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Sometime examiner only state the beta of a company he does not say anything like its an asset or a equity beta i believe in a time pressured exam its very rude to give information like that so what to assume in these circumstances. It happened in the question 38 of current kit question and a couple of more questions aswell could you clarify this issue please.
Thank you sir.To get the cost of redeemable debt, we always calculate the IRR of the after-tax flows.
The only time we calculate the PV of the interest and redemption flows (apart from as part of the arithmetic to get the IRR) is when we need to calculate a market value for the debt. Then we discount the pre-tax flows at the pre-tax cost of debt (because it is investors who determine the market value, and they do not get the benefit of tax relief).
Published beta’s are always equity beta’s and so in the exam assume a given beta is an equity beta unless told otherwise. If you are worried that you might have missed something in the question then always state your assumption. It will then be clear to the marker than you know what you are doing, and simply having missed something in the question will not lose you many marks (assuming you are doing the rest of the exercise properly).
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