- CFA Exams
- Forums
- General Forum
- Topic: Interest Rates & The Market Value of Debt
| Author | Topic: Interest Rates & The Market Value of Debt |
|---|---|
| keltapera @2014-04-10 20:41:34 |
Hey Everyone. I can’t seem to wrap my head around this concept: “An increase in interest rates results in a decline in the market value of the debt and lower debt used for analysis” (analytical purposes, not accounting). Anyone chime in on why this is? |
| shekharh @2014-04-23 22:32:20 |
As the discount rate increases the net present value decreases. This would reduce the market value of the debt. That sentence is basically saying that you could buy the debt back at the now lower market price so you may want to factor that lower price into the analysis. From a practical perspective, business valuation professionals will sometimes use the market value of debt, not the book value of debt, to arrive at a valuation of the equity in their analysis. |
