ACCA Financial Management (F9) Certification Practice Exam

What does the variable 'Pn' refer to in the redeemable debt capital formula?

1. Amount payable on redemption in year n

2. Current market price of debt

3. Interest paid for the nth period

4. Future cash flows from the investment

The correct answer is: Amount payable on redemption in year n

The variable 'Pn' in the redeemable debt capital formula refers to the amount payable on redemption in year n. This captures the cash flow that the issuer is obligated to pay back to the bondholder or debt holder at the time of redemption. In the context of redeemable debt, this amount is crucial because it represents the principal that will be returned to investors when the debt instrument matures or is otherwise repaid. Understanding this variable is essential for calculating the present value of the redeemable debt, as it reflects the cash flow that investors can expect to receive in the future and is fundamental in assessing the attractiveness of the investment. Assessing other options can provide clarity: the current market price of debt, while relevant for investors looking at the investment's current value, does not address what the issuer will pay upon redemption. Interest paid for the nth period refers to periodic interest payments rather than the final redemption amount. Future cash flows from the investment encompass various cash inflows but do not specifically pinpoint the amount payable at redemption. Thus, the correct identification of 'Pn' as the redemption amount aligns perfectly with the formula used in valuing redeemable debt instruments.