ACCA Financial Management (F9) Certification Practice Exam

Which type of loan notes are issued at a substantial discount to their nominal value?

1. Convertible loan notes

2. Deep discount loan notes

3. Zero coupon loan notes

4. Standard loan notes

The correct answer is: Deep discount loan notes

The correct choice pertains to deep discount loan notes, which are specifically designed to be issued at a significant discount relative to their nominal value. These financial instruments do not pay periodic interest or coupons to the investor; instead, they provide a return through the difference between the initial purchase price and the face value that will be paid at maturity. This structure makes deep discount loan notes appealing because it allows borrowers to obtain capital without the obligation of regular interest payments. This feature contrasts with other types of loan notes. For instance, convertible loan notes give investors the option to convert their notes into equity under certain conditions, but they typically do not involve steep discounts in the same manner as deep discount loan notes. Zero coupon loan notes, like deep discount notes, also do not pay interest but still may not be issued at the same level of discount as deep discount loan notes. Standard loan notes generally carry regular interest payments and do not usually feature significant discounts upon issuance. By understanding the specific characteristics of deep discount loan notes, it becomes clear why they are the correct choice in this scenario.