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Sir regarding irredeemable debt there’s a question in the text book which is slightly confusing.
The question is : Henry has 12% irredeemable bonds in issue with a nominal value of $100. The market price is $95 ex interest. Calculate cost of capital if int is paid “HALF YEARLY”.
The answer to this is (1+6/95)^2 – 1
I dont understand why they have added 1 before 6/95 and deducted 1 at the end.
It should just be 6/95^2 right?There has never been an exam question with half-yearly interest (and I doubt there ever will be).
However, then answer is correct.
If the 6 monthly interest rate is r, and the yearly interest rate is R, then
1+R = (1+r)^2
(I explain this in my Paper F2 lectures on interest (because it is revision from F2). It is the same logic as converting monthly interest to annual interest, which I explain in my Paper FM lectures on the management of receivables).
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