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Answers

Example 2

Compound instrument

On 1 January 20X5 a 5% convertible loan note is issued for $5,000. The loan
is repayable after three years for cash of $5,000 or may be converted to
equity. The market rate for loans with no conversion option is 8%.

Discount factors are as follows:
Year Discount Discount
factor at factor at
5% 8%
1 0.95 0.93

2 0.91 0.86
3 0.86 0.79

Required:

(i) Split the loan at inception between equity and liability

(ii) Show extracts from the financial statements for the year ended
31 December 20X5.

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