ACCA Financial Management (F9) Certification Practice Exam

Which of the following describes a deep discount loan note?

1. Paid back at face value with low interest.

2. Issued below nominal value, redeemed at or above it.

3. Provides regular payments to holders.

4. Requires no repayment until maturity.

The correct answer is: Issued below nominal value, redeemed at or above it.

A deep discount loan note is characterized by being issued at a price that is significantly lower than its nominal or face value, and it is redeemed at its face value or above at maturity. This type of financial instrument offers investors the potential for capital appreciation since they purchase the note for less than what they will receive upon redemption. The difference between the purchase price and the face value when the note matures represents the investor's return on investment. The other options do not accurately describe the nature of a deep discount loan note. While some may involve low interest or deferred payments, they do not capture the essence of a deep discount that is redeemed at or above its nominal value. Regular payments are not a feature of deep discount notes; instead, the return is realized only upon maturity when the face value is paid. Therefore, the correct description emphasizes the issuing price in relation to the redemption value, which defines a deep discount loan note effectively.