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Pre-tax Kd Vs. coupon

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Pre-tax Kd Vs. coupon

  • This topic has 6 replies, 2 voices, and was last updated 1 year ago by John Moffat.
Viewing 7 posts - 1 through 7 (of 7 total)
  • Author
    Posts
  • January 30, 2021 at 1:42 pm #608585
    Noah098
    Member
    • Topics: 935
    • Replies: 352
    • ☆☆☆☆☆

    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?

    January 30, 2021 at 3:55 pm #608599
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51532
    • ☆☆☆☆☆

    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.

    January 31, 2021 at 5:58 am #608622
    Noah098
    Member
    • Topics: 935
    • Replies: 352
    • ☆☆☆☆☆

    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?

    January 31, 2021 at 6:11 am #608623
    Noah098
    Member
    • Topics: 935
    • Replies: 352
    • ☆☆☆☆☆

    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

    January 31, 2021 at 8:51 am #608638
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51532
    • ☆☆☆☆☆

    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).

    January 31, 2021 at 10:14 am #608651
    Noah098
    Member
    • Topics: 935
    • Replies: 352
    • ☆☆☆☆☆

    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).

    January 31, 2021 at 2:28 pm #608676
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51532
    • ☆☆☆☆☆

    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.

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