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Coupon rate versus Effective interest rate

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Coupon rate versus Effective interest rate

  • This topic has 3 replies, 3 voices, and was last updated 2 years ago by P2-D2.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • May 19, 2021 at 8:07 am #621024
    akka17bakka
    Participant
    • Topics: 105
    • Replies: 99
    • ☆☆☆

    Hello Tutor,
    Could you kindly explain this schedule to me? What is the difference between interest receive and interest income here?

    Purchased 8%loan notes = $100000
    Effective rate = 10%

    Amortisation schedule:

    B/d $100000

    Interest received = $8000 ( 1000000*8%)

    Interest income = $ 10,000 (100000*10%)

    Amortisation – cash to be recived = 10,000- 8000 = $2000

    May 19, 2021 at 10:06 pm #621125
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Hi,

    The terminology used here is very confusing. The $8,000 is the interest income recognised through profit or loss. The $10,000 is the coupon cash receipt that reduces the outstanding loan notes balance.

    Thanks

    May 2, 2023 at 12:00 pm #683840
    thaarsini
    Participant
    • Topics: 0
    • Replies: 34
    • ☆

    Good day sir, the difference between yield and YTM is that yield is for ONE year actual return based on the coupon return and market value of the bond. So bond holder can see their actual earnings in the year.

    On the other hand YTM is the average return to bondholder if they hold it till maturity of the bond. Maybe first year the yield could be 6%, second year 7.2%, third year is 7.4% and forth year is 6.7% so the IRR (YTM) will be around 6.8% (for example). So YTM is like what investors will get in average of yield if they hold it till end of the bond matures…

    To calculate the MV or rate of return, i can use few ways:
    1) (coupon rate * par value)/MV = Rate of return
    2) Present value formula
    3) Future value formula

    May i know what i have written is correct sir? 🙂

    May 2, 2023 at 9:27 pm #683860
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Hi,

    This question is linked more to FM that FR so could you please post the query there to obtain your answer?

    Thanks

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