Financial management
This query is : Resolved
25 November 2018
When The Question Says : A Company Has In Issue 10% Loan Notes With Current MV Of Rs. 98. So The Rs. 98 Is A Cash Inflow Or Cash Outflow? Solving The IRR Calculation.
Ravi Agarwal
(Expert)
26 November 2018
A Company Has In Issue 10% Loan Notes With Current MV Of Rs. 98. So The Rs. 98 Is A Cash Inflow Or Cash Outflow? Solving The IRR Calculation.
The problem can be modelled as an IRR problem. Let me extend the example given by you as follows:
10% Loan Notes having a duration of 5 years are selling at Rs.96 (face value Rs.100). What is the yield to maturity?
We can model this problem as IRR:
Year 0, CF -96 (because you need to purchase the note at the prevailing market price)
Year 1 to 5 CF +10 (you will receive interest at 10% every year)
Year 5 CF +100 (you will get the maturity value of the note)
Using IRR function, you will get a YTM of 11.08%.
The problem can be modelled as an IRR problem. Let me extend the example given by you as follows:
10% Loan Notes having a duration of 5 years are selling at Rs.96 (face value Rs.100). What is the yield to maturity?
We can model this problem as IRR:
Year 0, CF -96 (because you need to purchase the note at the prevailing market price)
Year 1 to 5 CF +10 (you will receive interest at 10% every year)
Year 5 CF +100 (you will get the maturity value of the note)
Using IRR function, you will get a YTM of 11.08%.
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