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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Sir regarding market value of debt
mv is the the value of debt not (@t0) if it said I bought the debt a year ago or two years ago what would be the market value ( for irredeemable or redeemable debt) Thank you ….. say 100 nominal value.
The MV of the debt now is the PV of the future receipts discounted at the investors required rate of return. It does not matter what it cost two years ago.
sir what I mean is say interest is $10 and it will be redeemable @ 5 years of time and the required rate of return is 15% the market rate would =10*3.352+100*0.784(=$111.92 this is @year 0 say we are at end of year 2. what will be the market value @ end of year 2. since now the cash flow that would arise are the remaining interet rate and the principle payment?
At the end of 2 years, the expected future receipts will be interest of 10 per year for 3 years and redemption of 100 in 3 years.
Therefore the market value at the end of 2 years will be (10 x 3 year annuity factor at 15%) + (100 x 3 year PV factor at 15%).
(This assumes of course that the required rate of return in 2 years time is still 15% and has not changed).