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A company issues $20m of 4% convertible loan notes at par on 1 jan 2009. the notes are redeemable for cash or convertible into equity shares on the basis of 20 shares per $100 of debt at the option of the loan note holder on 31 dec 2011. similar but non-convertable loan notes carry a 9% interest rate.
discount factor for 9% : cumulative: 2.53, 3 year: 0.77
how will the loan note be accounted for on 31 dec 2009?
i understand the workings (given below) as at 31 dec 2009. i am trying to do calculations for 2010 and 2011 and please let me know if those are correct.
31 dec 2009:
Principal: 20,000 x .77 = 15400
interest 20,000 x 4% x 2.53=2024
total liab.=17424
equity=2576 ———————– as equity in SOFP
total=20000loan note balance:
Liability = 17424
Interest@9% = 1568 —————– as expense in P/L
less 4% int.paid= (800)
Loan balance = 18192 ————– as balance in SOFPnow for 31 dec 2010:
Liability= 18192
Int @9%=1637 ———————— as expense in P/L
int pad @4% = (800)
Loan Balance=19029 ——————- as balance in SOFPare the working for 2010 correct?
That looks ok to me – why not work it out for the last year and see if you arrive at $20,000?
i did. the value came out to be 60 short of 20,000.
Loan Balance: 19029
Int@9% = 1712
int paid = (800)
loan closing: = 19941shd it be exactly 20000?
No, and that’s why an exam question would not ask you to work it through to the final year!
If you look in the course notes for leasing, questions like Giedrius and Giedre have some very strange figures (by that I mean that they’re not $30,000 exactly or $16,000)
That’s because, when I was writing the question, I had to work backwards from a $zero solution to get to the start position, say, 7 years earlier. That then involved having to have Giedrius and Giedre having to make an installment payment of, say, $837 just so I could have the opening loan as a nice round figure
This $60 that you are short of from the ideal $20,000 is a bit of licence used by the question writer. You’re never intended to work the situation right through to the bitter end
OK?
Hi please explain to me how you arrive at $800 interest paid and why in year 2009 to calculate the interest on the bond you used 4% and 2.53? While for the rest for the years i see that you used 9%.
Thanks.
since its a 4% bond, the interest paid would be 4% of 20000 which is 800.
in 09, we are taking the present value of the 800 that we pay till 2011. the 2,53 is the annuity factor that u can look up in the tables.
u may be confusing between the 4% and 9%.
9% is used only on the liability part of the convertible bond. if u look again, u will see that i did use 9% for the liability part in 2009.
y we use 9%? because we r unwinding the discounts and that it is given that similar nonconvertible bonds r at 9%.
hope that helps
Thank you Mansoor (but really that was a question for me!)
Are you ok now Yvone?
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