Effective Interest Rate Calculation

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Lasa1
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Joined: 07 Oct 2020, 11:29

Effective Interest Rate Calculation

Post by Lasa1 »

Hi, I am going through the review of IFRS9 and came accross an example for which I will need some guidance:

Company A invests in debt of 3million $ with 1% discount on 01.01.20x1 (so cash disbursement is 2.97million).
The Coupon rate of the debt is 5% per year , payable on 31 Dec and is itself repayable on 31 Dec 01.01.20x5 at a premium of 5 million.
Business Model : There is intention to hold the investment until its maturity and there are contractual rights to cash flows on specific dates.

Question : Is there a way to calculate the effective interest rate?
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Marek Muc
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Re: Effective Interest Rate Calculation

Post by Marek Muc »

what do you mean by 'is itself repayable on 31 Dec 01.01.20x5 at a premium of 5 million.'

as long as cash flows are clear, there should be no difficulties in EIR calculation:
https://ifrscommunity.com/knowledge-bas ... rest-rate/
Lasa1
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Joined: 07 Oct 2020, 11:29

Re: Effective Interest Rate Calculation

Post by Lasa1 »

I just checked the Knowledge Base, very useful, thanks!
Lasa1
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Joined: 07 Oct 2020, 11:29

Re: Effective Interest Rate Calculation

Post by Lasa1 »

Referring to the example in the Knowledge Base : What I would like to learn is how XIRR gets to 7.8% so I learn how to calculate it myself. Is there any guidance on this?
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Marek Muc
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Re: Effective Interest Rate Calculation

Post by Marek Muc »

it's very easy :lol:

Excel uses an iterative technique for calculating XIRR. Using a changing rate (starting with guess), XIRR cycles through the calculation until the result is accurate within 0.000001 percent. If XIRR can't find a result that works after 100 tries, the #NUM! error value is returned. The rate is changed until:
xirr.gif
xirr.gif (417 Bytes) Viewed 2458 times
where:

di = the ith, or last, payment date.

d1 = the 0th payment date.

Pi = the ith, or last, payment.

https://support.microsoft.com/en-us/off ... 03ad9adc9d
Lasa1
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Joined: 07 Oct 2020, 11:29

Re: Effective Interest Rate Calculation

Post by Lasa1 »

:) :)
Thank You, I might stick to XIRR... ;)
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Marek Muc
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Re: Effective Interest Rate Calculation

Post by Marek Muc »

ok, so seriously speaking, you should be able to find plenty of information on how to manually calculate IRR, just look it up in google
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