Difference Between Coupon rate and effective rate of interest

Coupon rate = cash paid out
Effective rate = for P&L charge (same as IRR)

EG
One year zero coupon bond, issued for 100 and redeemed for 120

Coupon rate is 0%.
Effective rate (cost to company) is 20%.

You may find it useful to look back at our FR lecture and notes. The SBR materials take this as assumed knowledge.

All that matters in the exam is that you find the words EFFECTIVE RATE and use them to calculate the P&L charge.

🙂