Financial Management · The valuation of debt and other financial assets

How to Value Irredeemable Debt and Preference Shares

Updated 11 October 2026 · Fact-checked

Irredeemable debt pays interest forever and never repays principal. Its market value is the annual interest divided by the investor's required return: P₀ = I ÷ Kd. Preference shares with fixed dividends use the same perpetuity: P₀ = D ÷ Kp. Use the pre-tax return for investors, not the company's after-tax cost.

Understand Valuation of Irredeemable Debt

A bond is worth the present value of the cash it will pay you. Irredeemable debt (also called undated or perpetual debt) pays a fixed interest amount every year and is never repaid. So the cash flows are an endless level stream: a perpetuity.

The present value of a level perpetuity is the payment divided by the discount rate. If a bond pays ₹10 a year and investors want a 5% return, they will pay ₹10 ÷ 0.05 = ₹200. Adding up an infinite series of discounted payments gives a finite answer because later payments are worth less and less.

The discount rate is the required return of investors, also called the yield. It reflects the risk of the issuer and market interest rates. The interest is fixed by the coupon rate on the nominal (par) value, so it does not change when the market price changes. When market yields rise, the price falls. When yields fall, the price rises.

Preference shares with a fixed dividend and no redemption date work the same way. The dividend is the cash flow, and the investor's required return on the preference share is the discount rate. Note that preference dividends are normally paid out of after-tax profit, so they give the company no tax saving.

In FM, this topic is the investor's view. It links to the cost of debt, where the same formula is rearranged to find the return from a known price.

Key rules to remember

Market value of irredeemable debt: P₀ = I ÷ Kd; I = annual interest (coupon rate × nominal value). Kd = investors' required pre-tax return. Interest is assumed paid annually and a year away from now, i.e. ex-interest.
Annual interest: I = coupon rate × nominal value; Always work from the nominal value, not the market price.
Market value of irredeemable preference shares: P₀ = D ÷ Kp; D = annual preference dividend (rate × nominal value). Kp = required return of preference investors.
Yield from a known price (rearranged): Kd = I ÷ P₀; Gives the investors' return. This is also the pre-tax cost of debt to the company.
Value with interest about to be paid (cum-interest): P cum-int = I ÷ Kd + I; Use only if the next payment is due immediately and the question says so.

How to solve Valuation of Irredeemable Debt questions

Follow the same order for any question on irredeemable bonds or preference shares.

1Identify the security: irredeemable debt or irredeemable preference shares. Check that no redemption date is given.
2Find the nominal value and the coupon or dividend rate. Calculate the annual cash payment: rate × nominal value.
3Find the investors' required return. Use the market yield given, or a rate derived from similar securities. Use the pre-tax figure for debt.
4Check timing. If the payment is one year away (ex-interest), use the plain perpetuity. If it is due now (cum-interest), add one payment.
5Divide the annual payment by the required return, using a decimal (6% = 0.06).
6Scale to the question. The result is the value per ₹100 nominal, or per bond. Multiply by the number of units for total value if asked.
7State the answer with units and a short comment, such as price below nominal because the required return exceeds the coupon.

Quickest way: Price = payment ÷ yield

When to use it: Use for any Section A or OT case question asking for the market value or price of undated bonds or preference shares.

Write payment = rate × nominal on one line.
Divide by the required return as a decimal.
Sanity check: if yield is above the coupon rate, price per ₹100 nominal is below ₹100. If yield is below the coupon rate, price is above ₹100.
Scale by the number of bonds or shares only if asked for the total.

Common mistakes in Valuation of Irredeemable Debt

Calculating interest on the market price instead of the nominal value.
Students see a price and apply the coupon rate to it.
Fix: Interest always comes from coupon rate × nominal value. The market price is what you are solving for.
Deducting tax from the interest when valuing for investors.
Students mix up the company's after-tax cost of debt with the investor's valuation.
Fix: Use the given required return and the gross interest unless the question says investors' return is after personal tax. Tax relief belongs in the company's cost of debt only.
Using the percentage as a whole number, such as dividing by 8 instead of 0.08.
Rushing under time pressure.
Fix: Convert the yield to a decimal before dividing, and check the answer is sensible against the nominal value.
Forgetting the cum-interest or ex-interest wording.
Students treat every question as ex-interest.
Fix: Read for 'interest due shortly' or 'just paid'. Add one payment only when the next payment is immediate.
Applying a redeemable bond method to undated debt.
Students automatically add a redemption value.
Fix: If there is no redemption date, there is no redemption cash flow. Use the perpetuity only.
Giving the value per bond when the total was asked, or the reverse.
The nominal value unit (per ₹100 or per ₹1,000) is overlooked.
Fix: Check the unit in the question and scale the answer to it.

Worked examples

Example 1

A company has 7% irredeemable bonds in issue with a nominal value of ₹100 each. Investors require a return of 8% a year. Interest has just been paid. Calculate the market value of one bond.

Show the solution

Annual interest = 7% × ₹100 = ₹7.
Required return = 8% = 0.08.
Interest has just been paid, so the next payment is one year away. Use P₀ = I ÷ Kd.
P₀ = 7 ÷ 0.08 = ₹87.50.
Check: yield 8% is above coupon 7%, so price is below ₹100. This agrees.

Answer: ₹87.50 per ₹100 nominal bond.

Example 2

A company has 1,00,000 irredeemable 6% preference shares of ₹100 nominal each. Similar securities offer investors a 9% return. The annual dividend has just been paid. Calculate the value of one share and of the whole preference share capital.

Show the solution

Annual dividend per share = 6% × ₹100 = ₹6.
Required return = 9% = 0.09.
Value per share = 6 ÷ 0.09 = ₹66.67 (rounded).
Total value = 1,00,000 × (6 ÷ 0.09) = 1,00,000 × 66.6667 = ₹66,66,667 (rounded).
Cross-check by total dividend: 6,00,000 ÷ 0.09 = ₹66,66,667.

Answer: ₹66.67 per share; about ₹66,66,667 in total.

Exam tips

In OT questions, the answer options often include the trap values: interest on market price, or a redeemable-style answer. Do the two-line calculation and match exactly.
Check the wording on cum- or ex-interest before dividing. It changes the answer by one full payment.
In constructed response questions, show the formula, the interest line and the division. Method marks are available even if the final number is wrong.
If a question gives the price and asks for the return, rearrange to Kd = I ÷ P₀. Remember this is the pre-tax cost of debt, and apply tax relief only afterwards for the company's cost.
Add a one-line comment when asked to discuss: a price below nominal value means investors require more than the coupon rate.

Practice questions from The valuation of debt and other financial assets

Valuation of Irredeemable Debt in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Valuation of Irredeemable Debt: frequently asked questions

What is the formula for valuing irredeemable bonds?

The formula is P₀ = I ÷ Kd. I is the annual interest from coupon rate × nominal value, and Kd is the investors' required return. It treats the interest as a perpetuity.

Does tax affect the market value of irredeemable debt?

Not in the basic FM calculation. Investors value the interest they receive using their required return. Company tax relief only matters when you calculate the company's after-tax cost of debt.

How is valuing preference shares different from irredeemable debt?

The mathematics is the same: dividend ÷ required return. The differences are that the dividend is not tax-deductible for the company and that the required return is for preference shareholders, who bear more risk than lenders.

What if the interest is due immediately?

Then the value is cum-interest. Add the imminent payment to the perpetuity value: P = I ÷ Kd + I. The question will normally tell you the timing.