MLIMA CO, June 13

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February 26, 2016 at 11:01 am #302148
hermine
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We need to calculate the value of a 13% bond with a nominal value of $40m, which is redeemable at par in ten years. In the answer it takes the future borrowing rate of 7% as a yield to maturity and discounts at this rate.

Don’t we need to calculate the yield to maturity as IRR and use it when calculating the value of the bond?
February 26, 2016 at 3:21 pm #302196
John Moffat
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But how can you calculate the IRR when you don’t know the market value? 🙂

As the answer says, it is an assumption, but it is really the only sensible assumption available (to discount at 7% – the normal rate on its borrowing).
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