Page:63 (CFA book vol 4 , example 11) -> Bayern Chemicals’ cost to debt has an estimated spread of 225 basis points over the 10 year bund ( i guess its bond)! and solution shows: The before-tax cost of debt of Bayern Chemicals (rd)is 6.75 % rd=4.5% + 2.25% = 6.75 I am totally confused how they got this value, can somebody help me understand this calculation of Cost of Debt? Given:risk free long term bond rate=4.5%
Hey Zenmaster. I don’t have the book to reference your problem because i’m a level 2er. But i will try to help you out given the information… 1) The spelling of bund i assume to be correct. According to Investopedia.com: What Does Bund Mean?: The German government’s federal bond. The bund is issued to the public as a way for the German government to finance its spending Investopedia explains bund: The bund is like the Treasury bonds in the U.S. They are government-backed instruments of the highest quality. 2) You’re trying to figure out the cost of debt. In your post you wrote the 2 following items: a) cost to debt has an estimated spread of 225 basis points over the 10 year bund b) Given:risk free long term bond rate=4.5% cost of debt = rf + spread cost of debt = 4.5% + 2.25% cost of debt = 6.75 I’m not gonna differentiate bund or bond because i don’t know if you’ve changed the spelling after the first mention. But let the bond/bund represent the risk free rate as it will be the safest investment as it’s backed by whichever government. Your post states that there will be a 2.25% (or 225 basis points) spread over the bond/bund. Just plug it in as the problem says and you get the answer… Good luck.
Thanks a lot JaRvEy cost of debt = rf + spread and 2.25% (or 225 basis points) was the KEY!! I get it now 