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Hi,
I’m struggling with a part of the question here and I was wondering if you could help. It’s the Mar/June2021 paper. I’ll just copy out the text.
On 1st January 20X5 Peru Co acquired 6 million 6% coupon bonds for $6million in an unquoted company at par $1. Bond interest is paid annually on 31st December. Due to a premium on redemption the effective rate of interest was 8%.
The acquisition was on 1st July 20X5 and we have to calculate the fair value. I thought that you would always have to calculate the effective interest and the coupon and then take them away from each other? In the answers they only multiply the 6 million bond by the 8% to calculate its carry amount. Do we just ignore the coupon bond interest if it’s not a full year when calculating the fair value?
Thanks in advance.
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