NPV question
On a debt security issued at par, what would cause the IRR to the lender to be below its coupon rate, in effect “shifting” some of the value of the unlevered return away from the debt and to the equity?
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Said differently, why would a 5% coupon note have a lender IRR of 4.9% when it’s issued at par?
If the coupons are reinvested at a rate that is lower than 5%, then the IRR would be 5% even if the bond is issued at par.
Wait, what? IRRs on debt securities don't contemplate reinvestment of coupons / interest payments.
My guess on the slight variance between the coupon and the IRR is a minor TVM hit that the lender/investor takes between buying the bond and receiving the first interest payment (6-12 months out, depending on the security).
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