yield/ credit spread

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August 24, 2018 at 2:02 pm #469242
sarah
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Hi John
I’m getting confused about what the formulas below calculate:
Yield on corporate bond = risk free rate + credit spread
Cost of debt = (1-t)(risk free rate + credit spread)
Are these just intended as approximations? As i thought that cost of debt was an IRR calculation, and the same for the yield to maturity. From what i understood about the spot yield curve there wouldn’t be just one rate of return as it increases year on year. i think i am misunderstanding.
If you could help I’d be very grateful!
Thanks
Sarah
August 24, 2018 at 4:56 pm #469283
John Moffat
Keymaster
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It depends on the information in the question.
The calculation of the cost of debt depends on whether it is irredeemable (in which case Kd(1-t)) or redeemable (in which case the IRR of the after tax flows.
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