Irredeemable and redeemable debt

Question 1

Types of debt

Answer 1

Tradeable:
Irredeemable - interest only
Redeemable - interest until redemption
Convertible - may be converted to equity
Non-traded - bank loans

Question 2

MV of a loan note

Answer 2

May change daily - depends on level of interest rate for debt for the level of investment and period to maturity

Question 3

Debt holders Cost of Debt (irredeemable)

Answer 3

Kd=I/MV

Question 4

Company’s cost of debt (iredeemable)

Answer 4

Kd= i*(1-T)/MV
i = coupon rate interest
T = tax rate
MV = ex interest debt MV

Question 5

Tax relief on debt

Answer 5

Equity has no interest, but debt does, so company’s Kd is post tax

Question 6

Redeemable debt

Answer 6

T0 - (MV)
T1-n interest payments
Tn - Capital repayment

Calculate these with two Discounts factors and use the IRR calc to get the cost of redeemable debt

If it’s compnay’s cost, then multiply the coupon rate by the (1-T)

Question 7

Redeemable debt

Answer 7

T0 = (MV)
T1-T5 = Interest *(1-T) - if company end
T5 - repayment.
Use 5% and 10% if possible.

Then use the IRR calculation to get cost of debt