Cost issue on loan note

How ‘s treatment for cost issue on loan note?
Option1: Deduct issue cost from loan note value. Then, allocate interest pa on loan note (after deduct issue cost)
Option 2: Treat issue cost as prepayment in current asset in B/S and amortise it each year.

Which option is correct? Thanks.

For example:
Q2June2010:
“The 5% loan note was issued on 1/4/2009 as its value of $20million. The direct codes of the issue were $500,000 and these have charged to admin expenses. The loan note will be redeemed on 31/3/2012. The effective rate is 10% pa”