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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FA – FIA FFA › Effective annual loan interest
Dear Tutor, kindly advice/assist on how to do this calculation.
ABC Corporation management has decided to issue loan stocks to finance the expansion. The prevailing market interest rate is 7% and the management of ABC Corporation is considering the appropriate coupon rate for its loan stock. Based on the information obtained from investment bankers, the company could issue its $10 million loan stock, which is redeemable in ten years’ time, at either 9% or 5% interest rate, payable annually. The expected issued prices at the two rates are $13 million and $7.5 million, respectively.
Compute the effective annual loan interest expense for ABC Corporation under each of the two interest rate options, and recommend the interest rate option to be used.
This cannot be asked in Paper F3!