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kaplan revision kit q.no 63.part b
market value of each foriegn bond = (30.5*4.1)+(500*0.713)=481.55 pesos.i didnt understand this step, esp the values 4.1, 0.713
The market value of traded debt is equal to the present value of the future receipts discounted at the investors required rate of return.
Since the question says to ignore tax, the investors required rate of return will be equal to the cost of debt discounted at 7%.
The expected receipts on a bond of 500 are interest each year for 5 years of 6.1% x 500 = 30.5 p.a., and then repayment in 5 years time of 500.
The interest of 30.5 p.a. for 5 years is discounted by the 5 year annuity discount factor at 7% (which is 4.100) and the repayment in 5 years is discounted at the ordinary 5 year factor at 7% (which is 0.713).
If you have not already worked through it, then the relevant chapter in my course notes on here is chapter 15 – the second half of the chapter deals with the valuation of debt – and the lectures that go with it.
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