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Q.
Apollo took a loan on 1 Jan 2001.Loan carries an effective interest rate of 8%.The proceeds of loan are $2.5m,after paying the issue cost of $250k. The coupon rate on loan is 6% and the intrest cover ratio of 9 times has to be maintained.What is the profit needed to be maintained at 31 Dec 2001 in order to meet minimum interest cover?
Since the que has asked on interest cover ratio,so the 8% interest rate is used but what does the coupon rate on loan means and in which situation are such rate used ?
Hi,
Interest cover is calculated as PBIT/finance costs. We are given the interest cover as 9 and will need to calculate the interest on the loan to then work out PBIT.
To calculate the interest we need to measure the loan using amortised cost. The net proceeds are recorded as a liability initially and then the finance cost is charged at the effective rate of 8%, the loan liability is then reduced by the coupon rate of 6% on the nominal value.
If you re struggling on the amortised cost treatment then I suggest that you look at the video in the financial instruments chapter.
Thanks
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