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ACCA Strategic Professional · Advanced Financial Management · Corporate environmental, social, governance (ESG) and ethical issues

Nordvik plc issues a $200 million green bond at a 4.0% coupon. Comparable conventional bonds of the same maturity and rating yield 4.3%. The proceeds are ring-fenced for wind-farm projects and Nordvik is subject to tax at 25%. What is the annual post-tax interest saving in $ from the green bond versus issuing conventional debt at 4.3%?

The annual post-tax saving is $450,000. The 0.3% lower yield on $200 million saves $600,000 of interest before tax, and because interest is tax deductible at 25%, the net benefit is reduced to 75% of that amount, giving $450,000.

  1. A$450,000Correct
  2. B$600,000
  3. C$1,800,000
  4. D$150,000

Explanation

Pre-tax saving is 0.3% x $200m = $600,000. After tax at 25% the saving is $600,000 x 0.75 = $450,000. $600,000 ignores tax relief. $150,000 is just the tax effect, not the net saving. $1,800,000 wrongly applies a 0.9% differential.

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