## Cost of Existing Debt — Market Price Basis

When a company wants to know the cost of its currently outstanding debt (not a new issue), the relevant price is today's market price, not the original issue price.

### Why this matters

The market price reflects what investors would accept today to hold the debenture. If interest rates have risen since issue, the market price falls below par — and the effective cost to the company (measured from the market's perspective) is higher than the stated coupon.

### Formula (approximation)

```

Kd = [I(1−t) + (RV − MP)/n] / [(RV + MP)/2]

```

Where:

`MP` = Current market price (replaces NP)
`n` = Remaining years to maturity from today

### Step-by-step approach

1. Find remaining life: Maturity date − Current date

2. Calculate after-tax annual interest

3. Note the redemption value (usually face value at par)

4. Apply the approximation formula using MP

### Comparison with new issue cost

Measure	Uses	Purpose
New issue Kd	Net proceeds (issue price − costs)	Marginal cost for new borrowing
Existing debt Kd	Current market price	True economic cost of outstanding debt

Worked example

### Example 1

Q3 – Existing 10% debentures, market price ₹80

Issued 1.4.2012, matures 1.4.2022, valuation date 1.4.2017

Remaining life n = 5 years

Face = ₹100, Coupon = 10%, MP = ₹80, RV = ₹100 (at par), tax = 35%

After-tax interest = 10 × (1 − 0.35) = ₹6.50

Kd = [6.50 + (100 − 80)/5] / [(100 + 80)/2]

= [6.50 + 4.00] / 90

= 10.50 / 90

= 11.67%

Contrast with Q2 where the same debenture was issued at ₹110 premium → Kd was only 4.29%. The market price of ₹80 (below par) creates a capital gain on maturity, raising the effective cost significantly.

⚠️ Common exam mistakes

Using original issue price instead of current market price for existing debentures.
Calculating n from the original issue date rather than from the valuation date.
Confusing 'current cost of existing debt' with 'cost of new debt' — these serve different analytical purposes.

Reference:

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Cost of Existing Debt Using Current Market Price

Worked example

⚠️ Common exam mistakes