Q:

What is the formula for the market value of debt?

A:

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.

Know More

Full Answer

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.

Learn more in Economics

Related Questions

  • Q:

    What is an example of market economy?

    A:

    An example of the way a market economy works is how new technology is priced very high when it is first available for purchase, but the price goes down when more of that technology becomes available. This kind of price fluctuation is a central component of a market economy. That is, supply and demand dictates prices.

    Full Answer >
    Filed Under:
  • Q:

    What is an example of a resource market?

    A:

    An example of a resource market would be a job resource market where businesses gather new employees that are highly qualified for specific positions that the business's existing employees may not be able to fill based on qualifications alone. A resource market is a place where resources are exchanged and is not limited to money only as labor and raw materials such as steel can be exchanged.

    Full Answer >
    Filed Under:
  • Q:

    How are resources allocated in a market economy?

    A:

    In a market economy, resources are distributed based on the profitable interactions between producers and consumers. These interactions obey the fundamental law in economics, which is the law of supply and demand.

    Full Answer >
    Filed Under:
  • Q:

    What is the international financial market?

    A:

    The international financial market is the worldwide marketplace in which buyers and sellers trade financial assets, such as stocks, bonds, currencies, commodities and derivatives, across national borders. Key cities in the international financial market include New York City, London, Tokyo and Hong Kong.

    Full Answer >
    Filed Under:

Explore