Book Value Of Debt Vs Market Value Of Debt

Following are two possibilities if debt is not liquid.

Book value of debt vs market value of debt. It is traded in the open market. Market debt ratio is a modification of the traditional debt ratio which is the proportion of the book value of debt to sum of the book values of debt and equity of the company. A company s debt doesn t always come in the form of publicly traded bonds which have a specified market value.

Book value of debt long term debt notes payable current portion of long term debt usd 200 000 usd 0 usd 10 000 usd 210 000. So we can see that the debt for xyz corporation is usd 210 000 which would be different from the market value of debt. The market value of debt refers to the market price investors would be willing to buy a company s debt for which differs from the book value on the balance sheet.

Therefore if the market value of the debt is 1 000 000 the interest expenses are 60 000 and the maturity is 5 years and the current cost of debt is 8 then the market value of debt is. It has many advantages as compared to the market value of debt. This is true only if the company s debt has liquidity i e.

This paper assesses how the use of book rather than market value may have serious effects in empirical work. This mismeasurement is associated with changes in bond market yields. We will discuss the difference between book value wacc and market value weights and why market value weights are preferred over book value weights.

What is market value of debt. Companies get debt by taking loans from banks and other financial institutions or by floating interest paying corporate bonds. Book value sometimes but not always seriously mismeasures the market value of debt.

The simplest way to estimate the market value of debt is to convert the book value of debt in market value of debt by assuming the total debt as a single coupon bond with a coupon equal to the value of interest expenses on the total debt and the maturity equal to the weighted average maturity of the debt. Weighted average cost of capital wacc is defined as the weighted average of cost of each component of capital equity debt preference shares etc where the weights used are target capital structure weights expressed in terms of market values. The question assumes that market value of debt and book value of debt are different.