Book Value Of Debt Vs Market Value Of Debt

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.

Book value of debt vs market value of debt. 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. It has many advantages as compared to the market value of debt. Book value sometimes but not always seriously mismeasures the market value of debt.

What is market value of debt. It is traded in the open market. This paper assesses how the use of book rather than market value may have serious effects in empirical work.

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 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. To do this we construct time series on the market value of debt.

The question assumes that market value of debt and book value of debt are different. 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. 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.

Market debt ratio measures the level of debt of a company relative to the current market value of the company and is potentially a better measure of solvency because market values are more relevant than book values. This mismeasurement is associated with changes in bond market yields. In each you are using market value of debt but it happens to be the same as book value.

Companies get debt by taking loans from banks and other financial institutions or by floating interest paying corporate bonds. So we can see that the debt for xyz corporation is usd 210 000 which would be different from the market value of debt. Following are two possibilities if debt is not liquid.