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Hello sir; if we have to repay the loan at a premium of say 30 %after 6 years and interest on it is like 4 % ; isnt that premium sort of like interest as well over the period of the term ; so how will we account for it ? Is that normal interest rate of 4 %and 30 % both part of effective rate?
Have you by any chance looked at the mini-exercises at the back end of the course notes?
There are many examples there of repayment of loans and preference shares at a premium
In the exam the examiner will give you information along the lines of “The directors of the entity have calculated that the effective rate of interest of the loan is (say) 9%” or “A similar loan not redeemable at a premium typically carries a 9% coupon rate”
The effect of this information is that you calculate the finance charge based on the effective rate and not the coupon rate
i get that sir but basically what i want to ask you to clear my concept of effective rate is that, does the effective rate basically incorporate the basic finance charge + a charge to increase the value of loan if it will be paid at a premium? is that a fair point ?
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