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ACCA Applied Skills · Financial Management · The valuation of debt and other financial assets

Which of the following statements about the market value of irredeemable bonds is correct, assuming the coupon is fixed?

The market value falls when investors' required return rises. Irredeemable bonds are valued as a perpetuity, annual interest divided by the required return, so with a fixed coupon a higher required return gives a lower value, and the value equals nominal only when the two rates are equal.

  1. AThe market value rises when investors' required return rises
  2. BThe market value falls when investors' required return risesCorrect
  3. CThe market value is unaffected by changes in the required return
  4. DThe market value always equals the nominal value

Explanation

Irredeemable debt value = interest / required return, so value and required return move in opposite directions. A rise in required return therefore reduces the value. The value only equals nominal when the required return equals the coupon rate.

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