For the Highwood question, the liability part of a hybrid bond is assigned to non-current liabilities. Please could you tell me
1. why the current year’s payment isn’t removed (as in my mind it is no longer a liability because it has been paid?)
2. why next year’s liability isn’t moved to the current-liabilities section?
I thought the bond was payable in x years’ time. Surely the only adjustment is the unrolling of the discount and there is in fact no payment of cash being made.
I may be wrong – I don’t have the question handy. If you believe that my answer is incorrect, please post again
Hi Mike, the question says “Interest is payable annually in arrears on 31 March each year”. I’m not sure if cash is actually paid or rolled over, how can I be sure?
If it’s payable annually in arrears, it’s been paid. Is there not an “effective” rate of interest which should be applied to the amount outstanding and adjusted for?
It’s described as an “8% $30 million convertible loan note” and then later it says:
“Highwood’s finance director has calculated that to issue an equivalent loan note without the conversion rights it would have to pay an interest rate of 10% per annum to attract investors”
Ok, issue a $1,000 8% loan note which has an effective rate of 10%
After 1 year, the finance charges should be 10% of 1,000 ie 100. The obligation is therefore 1,100. But we will have paid 8% by way of loan interest ie 80, so that will reduce the obligation back to 1,020 and that’s the figure to carry forward.
Next year, the finance charge is 10% of 1,020 ie 102. The obligation now stands at 1,122. Butt we will pay interest of 8% of 1,000 and that brings the obligation figure to carry forward into the next year back to ( 1,122 – 80 ) 1,042.
And thus it goes on!
At the end of the course notes, around page 200, you’ll find the mini-exercises. To improve your chances of success in F7, you really should do all those mini-exercises!!
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