ACCA Financial Management (F9) Certification Practice Exam

What is the nature of an irredeemable loan note?

1. It has a set repayment date

2. It is never repaid

3. It requires annual interest payments

4. It can be converted to equity

The correct answer is: It is never repaid

An irredeemable loan note, often referred to as a perpetual bond or perpetuity, has a distinct characteristic in that it is never repaid in full. Instead of a set repayment date, the principal amount remains outstanding indefinitely. Investors receive interest payments at regular intervals, but they do not receive their initial investment back. This ongoing nature of the loan note makes it an attractive option for investors seeking a steady stream of income without the concern of the principal being repaid. Other characteristics of an irredeemable loan note are also pertinent. While these notes typically require annual interest payments, this feature alone does not define their irredeemable nature. The option indicating it has a set repayment date does not apply, as the defining feature is the absence of a repayment timeline. Similarly, while some convertible instruments exist in the market, converting an irredeemable loan note into equity is not a typical characteristic associated with its nature. Thus, the fundamental quality of being never repaid clearly substantiates the identification of an irredeemable loan note.