What is the formula for the market value of debt?

Answer

The formula for the market value of debt is E((1-(1/(1 + R)^Y))/R) + T/(1 + R)^Y, where E is the annual interest expense, R is the cost of debt, T is the total debt and Y is the average maturity, in years, of the debt. However, calculating the market value of debt can be tricky, because not many firms carry their debt in bond form.

A lot of companies carry debt that is not traded, like loans from a bank. The value of that debt is specified in terms of book value rather than market value. This formula calculates the whole debt as a coupon bond, assuming that the coupon is equal to the interest expense and the maturity is equal to the average maturity of the debt, valued at the current debt cost and weighted at face value.

Therefore, if the company's debt cost is 6 percent, the interest expense is $100 million, the total amount of debt is $2 billion and the average time to maturity is three years, the estimation looks like this: 100((1-1/1.06^3))/0.06) + (2,000/1.06^3). The values here are in millions, so the estimated value comes to roughly $1,946 million dollars. More precise results come from adding all of a company's debt issues separately.

Q&A Related to "What is the formula for the market value of..."
1. Determine the market value for all of the company's debt that is traded in the bond market. Market value of traded debt can be found in various sources, both online and in print.
http://www.ehow.com/how_7642356_calculate-market-v...
Market debt ratio= TL / (TL - Equity) Note : equity with market value .
http://wiki.answers.com/Q/What_about_formula_for_m...
Market Value Debt = (0.595 x 99M) + (0.57 x69 M) = 98.235 M.
http://answers.yahoo.com/question/index?qid=201306...
Hi, this article may interest you http://www.trulia.com/blog/flaviotejada/2012/02/the_fuzzy_ma… Good luck Buyer 50%-60% Cash Rebate / Seller 50% Commission Discount Quality
http://www.trulia.com/voices/Home_Buying/How_does_...
Explore this Topic
Price per share is calculated by dividing the market value per share with earnings per share, which is abbreviated as EPS. Price per share simply refers to a valuation ...
To prove insolvency form 982 must be filed with income taxes. A person can be considered insolvent if their total debt exceeds the fair market value of all their ...
About -  Privacy -  Careers -  Ask Blog -  Mobile -  Help -  Feedback  -  Sitemap  © 2014 Ask.com