Question

How is the promised yield different than the actual yield? How does this impact the cost of debt utilized in the DCF model?

Answer 1

Promised yield is the yield which is the expected return from a bond when the investment is made while the actual yield to the maturity which is earned in actual rather than the expected yield.

There are a lot of market factors which acts as a deciding factor for the actual yield such as the monetary policy ,the interest rate risk and because of these factors, yield on the bonds are decided by price discovery through continuous trading.

These impact the cost of debt because while doing discounted cash flow analysis, the anticipated yield is considered and in reality, actual yield is earned so there is a difference between the two and that will lead to deviation in calculation.