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Compound Instrument

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA SBR Exams › Compound Instrument

  • This topic has 3 replies, 2 voices, and was last updated 2 years ago by Stephen Widberg.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • April 28, 2023 at 6:46 pm #683710
    akka17bakka
    Participant
    • Topics: 105
    • Replies: 99
    • ☆☆☆

    Hello,

    Tutor, can you please explain, after incurring issue cost (compound instrument) why does the ”effective rate of interest” increases?

    April 29, 2023 at 7:59 am #683715
    Stephen Widberg
    Keymaster
    • Topics: 16
    • Replies: 3408
    • ☆☆☆☆☆

    5 year bond, does not pay interest.

    Issued at 100 and redeemed at 120. Finance cost of 20 must be spread over 5 years.

    BUT if issue costs were 5, bond would effectively be issued at 95 (company receives 100 but has to give 5 to arranging bank). So now 25 finance cost must be spread over 5 years. SO IRR WILL BE HIGHER.

    April 29, 2023 at 9:25 am #683719
    akka17bakka
    Participant
    • Topics: 105
    • Replies: 99
    • ☆☆☆

    Would it be fine if I say I didn’t get it clearly? Can you please rephrase it a bit?

    April 30, 2023 at 8:28 am #683751
    Stephen Widberg
    Keymaster
    • Topics: 16
    • Replies: 3408
    • ☆☆☆☆☆

    Please watch the following (FR not SBR):

    https://opentuition.com/acca/fr/financial-instruments-example-amortised-cost-acca-financial-reporting-fr/

    Then come back to me if you need to.

    🙂

  • Author
    Posts
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