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In note 4 the bonds were impaired. When discounting future cashflows i thought you use the original effective interest rate. (which is what is done in this question by my old tutor and by Kieran Maguire online). The suggested answer in the paper uses the current interest rate for discounting cash flows of 10% Which is correct? I have searched and searched online but cant get a definitive answer and would really appreciate some help on this.
Thanks in advance,
Deborah.lThe correct interest rate – effective rate of interest at the bond issue date!!! It’s important that you know – identifying errors in exams and note same.
Success for ALL!!!!!!!!!!!!!!
@Cardine said:
The correct interest rate – effective rate of interest at the bond issue date!!! It’s important that you know – identifying errors in exams and note same.Success for ALL!!!!!!!!!!!!!!
Do you mean current rate Cardine?
Issue date means – original date. You need to be able to identify the requirements through wording – please take note – wording in the exams will through you off track!!!!
Sometime you may also be ask to calculate the effective rate of interest if not given in question, which you’ll will use the purchase price and face value to do so dividing by the number of payments; then adding original payment amounts.
Please do not panic it simple practice!!!!
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Guys, the questions sais taht bonds were accoiunted at FVTPL. that means that historic effective rate is irrelevant(it is used for amortise cost method only) and there fore new FV should be calculated bsaed on DCF method with current market rate.
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