- This topic has 16 replies, 3 voices, and was last updated 1 year ago by
.
- Posts
sir if we are fed with both coupon and Pre-tax cost of debt, then does that mean Pre-tax Kd=YTM or yield in other words?
Yes it does – the pre-tax cost of debt is the yield to maturity.
The coupon rate is simply the rate of interest on nominal value.Sir but when calculating Profits after interest, we multiply the book value of debt with Coupon or YTM for interest calculation that will go in the SPL?
In F7 we used to take YTM or effective rate as far as interest calcautlion was concerned in Statement of Profit or loss. And for Statement of cash flow we would take coupon payment. but in AFM am a little confused
The actual interest paid is always the coupon rate multiplied by the nominal value.
This is the case in real life, and in Paper AFM (and in Paper FR).
Sir I totally agree with you on that, that the cash outflow or interest paid is coupon multiplied by nominal value. But as far as Statement of Profit or loss(SPL) is concerned we should take effective rate or YTM.
Because the cash outflow may not be the same as the effective cost per annum for the company(lets say the bond was issued at a discount, in which case the effective rate is more than coupon).
We show the actual interest for the year which is the coupon rate multiplied by the nominal value.
The YTM is of no relevant for the SOPL – it is used to calculate the market value of the bond.
Good day sir, usually to calculate tax shield for APV question we will take the debt amount multiple with KD before tax also known as YTM. If the rate was not given then i can use risk free rate. However if question has given risk free rate and kd before tax, it means at first i can use debt amount multiple with kd before tax however for discounting part i can either discount it using kd pre tax or risk free rate right sir?
The answer will be different but it is still acceptable right sir?Yes. The examiners answers always make it clear that discounting at either rate is acceptable (even though obviously the final answer is different).
I do explain this (and the logic behind using each of the two rates) in my free lectures on APV.
Yes sir i have watched the free lecture, i am actually confuse at the term because sometimes kd before tax is considered as YTM, sometimes risk free rate plus with credit spread is kd before tax, sometimes coupon rate is kd before tax.
Because as i know coupon rate is the a fixed rate of interest payment bondholder will receive each year. On the other hand YTM is the rate of return bondholder receive if they hold it till the maturity.
Too many technical terms is making me confuse actually 🙁The YTM is the same as the investors required rate of return. The required rate of return is the risk free rate plus the credit spread. They are all before tax because the investors are not liable to company tax.
The coupon rate is the fixed interest on nominal, which is not the same as the the required rate of return.
Correct – the coupon rate is not the YTM (unless the debt is irredeemable and the market value is the same as the nominal value).
Sir, it means if in question said market value is same as par value, then it means coupon rate = ytm (POINT A). So that is only why i can take coupon rate as ytm. Another point sir said it needs to be irredeemable (POINT B). It means both POINTS needs to be together in the a question then only i can take coupon rate as kd before tax or even with either point i can take coupon rate as my kd before tax?
- The topic ‘Pre-tax Kd Vs. coupon’ is closed to new replies.