Question

Debenture having face value Rs. 100 is issued by company for Rs. 120. Coupon rate is 12%. Calculate return on debt​

Answer 1

The return on debt can be calculated using the formula:

`\displaystyle\sf \text{Return on Debt} = \left(\frac{\text{Annual Interest}}{\text{Cost of Debt}}\right) * 100`

In this case, the face value of the debenture is Rs. 100 and it is issued for Rs. 120. The coupon rate is 12%, which means the annual interest is calculated as 12% of the face value.

The annual interest is
`\displaystyle\sf 0.12 * 100 = 12`.

The cost of debt is the amount at which the debenture is issued, which is Rs. 120.

Substituting the values into the formula:

`\displaystyle\sf \text{Return on Debt} = \left((12)/(120)\right) * 100 = (1)/(10) * 100 = 10\%`

Therefore, the return on debt is 10%.