cost of debt – EAR

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  • #244225

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    This forum is restricted to members of the associated course(s).

    ihf7
    Participant

    Dears, 

     

    hope you’re well. 

     

    reference to the example under subeject cost of debt – page 128.. i’m having a hard time understanding how in this example we come with EAR of 7.4%. 

    Please note that i applied the EAR formula and I came up to the result of 6.16%

     

    hooping for your support. 

     

    thanks,

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  • #244233

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    Lynn Roden
    HOCK international

    Hello ihf7,

    We are all well here, thank you. I hope you and yours are, too.

    When there is a discount or premium for a bond, the Yield to Maturity of the bond (its effective interest rate) can only be calculated with a computer or a financial calculator. It can be done in Excel, and I am attaching this bond’s calculations in Excel. I have also created the amortization schedule for the discount in the same Excel spreadsheet so you can see what is happening. The annual interest rate is 7.4% but the coupon rate is 6%. The difference is the amortization of the discount. Each time the discount is amortized, the principal of the bond on which the next interest is calculated changes.

    You can find more information about bonds and amortization of a premium or discount in your HOCK CMA Part 2, Vol. 2 textbook, in Study Unit 6 in Section B. There is also an example of a discount amortization on a bond payable in that book in Appendix B.

    Lynn

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