## Other Issues in Cost of Debt (Kd)
Beyond the standard redeemable/irredeemable debenture computation, several special situations affect how Kd is calculated. The recurring trap is using a year-end face-value redemption assumption when the actual cash-flow pattern is different.
### 1. Amortization of Debenture / Bond
A bond may be amortized every year — i.e. the principal is repaid in instalments over the life rather than as a single lump sum at maturity.
- As principal is repaid each year, the outstanding principal falls, so the interest (charged on the outstanding balance) also falls.
- Result: the bond's cash flows are uneven year to year.
- Value the bond by discounting each year's actual cash flow:
$$V_B = \frac{CF_1}{(1+k_d)^1} + \frac{CF_2}{(1+k_d)^2} + \frac{CF_3}{(1+k_d)^3} + \dots + \frac{CF_n}{(1+k_d)^n} = \sum_{t=1}^{n}\frac{CF_t}{(1+k_d)^t}$$
### 2. Cost of Convertible Debentures
Holders may, at redemption, choose either cash redemption or a specified number of the company's equity shares.
- The computation is otherwise the same as a redeemable debenture.
- Assume every holder picks the more valuable option. Therefore:
> Redemption Value = HIGHER of (a) Cash value of debenture, or (b) Value of the equity shares offered on conversion.
Use that higher figure as RV in the Kd formula.
### 3. Zero Coupon Bond (Deep Discount Bond)
- Issued at a deep discount and redeemed at par.
- No coupon/interest is paid during the bond's life.
- Kd is found using the YTM approach — the discount rate that equates issue price to the redeemed value:
$$B_0 = \frac{RV}{(1+k_d)^n}$$
### 4. Treatment of Short-Term Debt
- Short-term debt (e.g. creditors) is a current liability, not part of capital employed.
- Therefore exclude short-term debt when computing WACC (Ko).
### 5. Cost of Long-Term Bank Loan
- Treated like a normal Kd computation but simpler — there is no premium/discount concept.
$$k_d = \text{Interest Rate} \times (1 - t)$$