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Hello Tutor,
Could you kindly explain this to me?
”On 1 Jan x1, Napa purchased a bon for $1M which is measured at amortised cost. Interest of 10% is payable in arrears. Repayment is due on 31 dec x3. Effective rate of interest is 10%.”
Could you kindly explain the two interest rates please?
Thank you.
This is a very simple bond.
You lend 1000. Every year you get 10% interest in cash. At the end you are repaid 1000.
So the nominal and effective rates are the same.
Nominal and effective are only different if the bond is purchased at a discount or redeemed at a premium, which, unfortunately happens in most exam questions!
Okay, I got confused when it said interest is payable in arrears and I was thinking he purchased it not borrowed it.
Thank you,
God bless.
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