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Hi Mr Moffat could you assist with this question from the mcq? I seem to be missing something.
A company has in issue loan notes with a nominal value of $100 each. Interest on the notes is 6% per year, payable annually. The loan notes will be redeemable in eight years time at a 5% premium to nominal value. The before-tax cost off debt to company is 7% per year. The rate of company tax is 30%.
What is te ex-interest market value of each loan notes?
Answer is $96.94
I am getting $92.53
The market value is determined by the investors and is the present value of the expected receipts discounted at their required return of 7%.
On $100 nominal, the expected receipts are:
Interest of $6 per year from years 1 to 8
Redemption of $105 in 8 years time.If you discount these flows at 7% you will come to $96.94
(Tax is irrelevant – it is only relevant when considering the cost of debt to the company)
Mr Moffat thanks I picked the wrong pv dcf in error for the 105 thanks again
I need help with one more thanks. Can I see the working for this one?
An investor plans to exchange $1,000.00 into euros now, invest the resulting euros for 12 months, and then exchange back into dollars at the end of the 12 months period. The spot exchange rate is EUR1.415 per $1 and the euro interest rate is 2 % per year. The dollar interest rate is 1.8 per year.
Compared to making a dollar investment for 12 months, at what 12 month forward exchange rate will the investor make neither a loss nor gain?
ANSWER EUR1.418
In future you must start a new thread when it is a question on a different topic – this question obviously has nothing to do with loan notes 🙂
You can get the same answer in two ways. Either you can work through the full money market hedging on this question and then calculate what rate effectively makes the amount in 12 months equal.
Alternatively (and quicker) you can use the interest rate parity formula on the formula sheet (because forward rates are determined from the relative interest rates).
So the forward rate = (1.02 / 1.018) x 1.415 = 1.418(Our free lectures on forward rates and money market hedging will help you.)
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