The coupon rate is the rate that is contractually written in to the loan agreement and must be paid by the issuer to the investor. The amount of interest is the coupon rate applied to the par value of the debt and is then paid in cash to the investor.

The effective rate of interest is accounting for the substance of the loan transaction as opposed to the legal form. The effective rate is the rate that discounts all of the future cash flows to the initial amounts of the loan and is calculated using the IRR of the cash flows. This effective rate it then applied to the outstanding loan balance to calculate the effective amount of interest that is charged through profit or loss.

Thanks for the lecture. I had one basic doubt related to the third part of example 2. I want to understand the basic difference between coupon rate and interest rate and its relationship? Meanwhile, in this example the buyer purchased the debenture @ $980,000 and redeemed the same @ $1,050,000 in 4 years time. Also, the coupon interest received of (40,000 * 4) $160,000 and interest income of approximately $250,000. As a buyer of the debenture, is it a right to receive both these interests and please explain the relationship between both the rates in this particular context.

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ruthguy says

such a helpful lecture!!

one quick question – what would the double entry be for the gain in the FVTOCI of £80k in example 2 please?

Thank you

P2-D2 says

Hi,

The coupon rate is the rate that is contractually written in to the loan agreement and must be paid by the issuer to the investor. The amount of interest is the coupon rate applied to the par value of the debt and is then paid in cash to the investor.

The effective rate of interest is accounting for the substance of the loan transaction as opposed to the legal form. The effective rate is the rate that discounts all of the future cash flows to the initial amounts of the loan and is calculated using the IRR of the cash flows. This effective rate it then applied to the outstanding loan balance to calculate the effective amount of interest that is charged through profit or loss.

Hope that helps.

Thanks

pskr says

Thanks for the lecture. I had one basic doubt related to the third part of example 2.

I want to understand the basic difference between coupon rate and interest rate and its relationship? Meanwhile, in this example the buyer purchased the debenture @ $980,000 and redeemed the same @ $1,050,000 in 4 years time. Also, the coupon interest received of (40,000 * 4) $160,000 and interest income of approximately $250,000.

As a buyer of the debenture, is it a right to receive both these interests and please explain the relationship between both the rates in this particular context.

Thanks again!