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Sir in this a part they have calculated interest income as 3 using effective interest rate of 6%. First of all what I think is they shud have given a lower effective rate of interest because the fair value has fallen for the asset.
In any case shudnt we calculate the interest as 2.52 using fv of 42m and effective rate of 6%?
Hi,
The answer is trying to calculate the value of the bond prior to any changes in it structure, so for the year to March 2017 the coupon rate and effective rate will have been as they were, i.e. at 6%.
There may be changes to the effective rate in the future but that is not something that we need to concern ourselves with as it is not relevant in the scenario.
Thanks
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