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Hi John,
In the event that there is issue cost (assume to be paid for debt issuer aka company), it has to be deducted from the market value of the bond at T0 for the company.
For the investor, I assume it does not matter as he pays $100 and gets a fixed cash inflow in the future. However, assuming he wants to sell the bond on the same day he bought it, how should the market value be calculated? is it the PV of the future cash flows discounted at the interest rate without considering the issue cost, meaning he bought the bond at $90 at T0 and sell it on the same day for $90 (excluding issue cost as it does not matter to the investor).
I am not sure that I understand what you are asking.
The market value is always the PV of the future flows. The issue cost does not affect the market value (it just means that the company ends up with less money. They net receipt is the issue proceeds less the issue costs that they incur. Obviously that might mean that they have to raise more cash than they need for investment in order to cover the issue costs.
Thanks John. Do I need to deduct issue cost from market value when calculating IRR / Kd?
Kd is the IRR using the MV of the debt. The MV has nothing to do with the issue costs.
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