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Cost of irredeemable debt

Cost of irredeemable debt

Irredeemable debt is debt that has no specific redemption date or maturity period. The issuing authority or entity pays a specified interest rate periodically but provides no data on when principal will be returned. Another name for irredeemable debt is perpetual debt or consol.

As long as a company or other issuing entity does not default on the debt and pays the coupon rate as noted, the coupon payment can extend forever on irredeemable debt. The issuing entity is responsible for the coupon payments. Therefore, if it defaults, the principal on the bonds will come due.

There are two types of Irredeemable debt as follows:

1. cost of debt for irredeemable debt (no tax)

Kd = i/P0

Kd = cost of debt (required rate of return)

i = annual interest paid

P0 = ex interest market value of debt

2.Calculating the cost of debt for irredeemable debt (with tax)

Kd = i(1-t)/P0

Kd = cost of debt (required rate of return)

i = annual interest paid

P0 = ex interest market value of debt

t = corporation tax rate

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