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Calculating EIR

  • 12-01-2018 6:02pm
    #1
    Alerium
    Registered Users Posts: 185 ✭✭


    Hello

    I'm trying to familiarise myself with EIR and interest rates in general and have been doing some free online material. I've come across a question that I just can't get around my head.

    Question:
    A Bank issued debt with a maturity of 3 years on 1 January 2012. The debt had a nominal (par) amount of €1,000,000,000 and a coupon of 3%. The bank issued the debt at a premium (over par) at 105.

    i) Calculate the EIR on the debt issuance.
    ii) Calulate the correct P/L interest charge on an EIR basis in the 2012 income statement.

    Can someone please help me solve this. I don't understand the 105 over par bit in particular.

    Many thanks


Comments

  • #2
    L.Jenkins
    Moderators, Computer Games Moderators, Technology & Internet Moderators Posts: 19,241 Mod ✭✭✭✭L.Jenkins


    Alerium wrote: »
    Hello

    I'm trying to familiarise myself with EIR and interest rates in general and have been doing some free online material. I've come across a question that I just can't get around my head.

    Question:
    A Bank issued debt with a maturity of 3 years on 1 January 2012. The debt had a nominal (par) amount of €1,000,000,000 and a coupon of 3%. The bank issued the debt at a premium (over par) at 105.

    i) Calculate the EIR on the debt issuance.
    ii) Calulate the correct P/L interest charge on an EIR basis in the 2012 income statement.

    Can someone please help me solve this. I don't understand the 105 over par bit in particular.

    Many thanks

    From my understanding 105 above par is 105%. So €1,000,000,000 x 1.05 = €1,050,000,000.

    With that, the bond payable is €1,000,000,000 and the premium payable on said bond is €50,000,000.

    So I hope my understanding is correct.


  • #3
    HcksawJimDuggan
    Registered Users, Registered Users 2 Posts: 394 ✭✭HcksawJimDuggan


    +1 on L.Jenkins explanation of over par

    I have calculated the EIR to be 1.29% & 2012 interest charge is 16,453,480


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