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For june 2014 exam , for question on XTOL, the transaction regarding convertible loan loan(complaex instrument)
It is stated that the “interest is payable annually in arrears on 31 march each year.”
Does it matter whether the interest is paid in advance or arrears ? Will the answer differ?
If it’s paid in advance, on 1April, each year at the end of year 31 March, 2014 there will be an accrual for the interest accrued since last payment date (1 April, 2013) to year end 31 March, 2014 as well as the capital amount outstanding – that’s the figure in your computations immediately after the last capital repayment was made
Or, if there’s no loan instalment payments involved, it’s:
present value of loan brought forward +
interest at effective rate calculated on the present value of the loan brought forward –
interest actually paid calculated on the face value of the loan at the interest rate shown in the loan agreement =
present value of loan carried forward
If interest is paid in advance (1 April instead of 31 March) you need to be careful when calculating the present value of the minimum obligations. The March payment immediately after signing the loan agreement will have no interest included (because we signed the loan agreement just “today” so no time for any interest to accrue)
For question on WELLMAY for june 2007 exam, transaction (iii)
Is that an example of a question on compound instrument where interest is paid in advance? I want to try one question on it.
From what I can see, Wellmay interest is paid on 31 March and that’s a payment in arrears
I’m going to say that it would be extraordinarily unusual for interest to be paid in advance
Personally, I wouldn’t bother about it.
Move on to something less unusual and therefore more likely to come up in the exam
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