Interest on 15% convertible loan note (long term)

Your tuition provider is correct. This is an example of accounting for a financial instrument where the par value / nominal value / coupon rate attributable to the loan note is different than the (in exam wording) a realistic market rate Let me guess, this is a $20,000 5% loan note issued that has a conversion option and valuers have researched and determined that a similar loan without the conversion option would command an interest rate of 15% We need to discount the $20,000 to get the present value as at date of issuance and then, each year, calculate how much interest at 15% is due on that discounted figure. Deduct the $1,000 actually paid (5% x $20,000) and the remainder is then added to the brought forward figure of the increasing obligation In your example, that's $1,766 being added to the amount of $18,440 Is that ok?

Thank you very much, Sir! You make me clear.

You're welcome