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Hello Tutor,
Could you please help me understand, in amortisation schedule,the coupon rate is the rate at which as a lender we will receive interest. But what is Effective rate of interest or Market rate? Why do we add it as an Interest income?
Thanks.
It’s the IRR. Think back to your FM.
If I borrow 1000 and repay 1100 after 1 year (but no coupon is paid), the IRR will be 10%. This is the effective rate. Charge 100 (10%x1000) to P&L.
You may find it helpful to revisit our FR materials / lectures, where this is covered.
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