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Hi
my first question is how do you determine the market value of debt is it determined by whether it is redeemable or not or is it to do with ex interest market value or the word respectively.
The reason I am a little confused is in question 12 c and d – both are redeemable debt and you take the % of debentures off the ‘valued’ or the ‘% respectively’ to give you the market value for the calculation.
However in question 13 it is irredeemable and has a ex interest market value of 95 per cent which is used in the calculation without deducting the % of debt! can you please explain this to me?!My other question is based on question 13 c, my IRR I have calculated is as follows- DF 10% – (39.63) and DF %- (14.02) when i come to do my IRR calculation it does not agree to the answer. I do:
5 + (14.02/53.65*5) = 6.3% or
10-(39.63/25.61 *5) = 2.2 %
Am I going completely wrong? i have manged to do the other questions of IRR but this one i cannot seem to get right?!
Many thanks
JemmaAs well I have just done question 14 and do not understand the first money market answer, what we purchase is $116,000 not £116000 so why can you not just take the net figure similar to the 6 month money market?
thanks
If I understand your question correctly, it is because in 12 (c) it says that interest is ‘shortly to be paid’ and ‘will soon be paid’ (i.e. will be paid soon) and to it is a cum-interest value – the interest needs to be subtracted to get an ex-interest value.
In question 13, it says that the value is ex-interest – i.e. the interest has already been paid.
I do suggest that you watch my lectures on this where I explain the difference between cum and ex interest values.
With regard to you IRR calculations, the difference between -39.63 and -14.02 is 25.61.
So your first answer should be (5 – (14.02/25.61)*5)) = 2.2%(It is different from the answer in the course notes because different guesses will give different IRR’s – it is only an approximation because the relationship is not linear.
With regard to question 14, I am sorry but there are some dreadful typing errors in the answer.
Admin has corrected them and so if you re-download the course notes then it should be OK.I do apologise 🙁
hi thank you for this i have re looked over it to make sense thank you!!!
However i did try and download the new course notes to look at question 14 however it seems to be the same information!!
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