Calculating EIR

Alerium

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

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.

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