Final answer:
The value of a loan asset at amortised cost is calculated based on future payments discounted at the market rate of interest. This includes adjustments for actual payments, expected credit losses, and accrued interest. Banks also factor in the risk of loan defaults, which can negatively impact their assets and net worth.
Step-by-step explanation:
The student's question pertains to how to measure the present value of a loan asset at amortised cost when granted at a below-market interest rate, specifically an interest-free loan provided for energy-efficient modifications. Given a loan of $2 million with a market rate of interest for a similar loan being 10%, this loan constitutes an asset for Southpoint Ltd. The current value can be measured by discounting the future payments at the market rate of interest, taking into account expected credit losses. The loan's amortised cost involves adjusting the initial measurement of the loan for any payments and write-offs made during the period, as well as for accrued interest, using the effective interest method.
From a bank's perspective, a loan, such as a 30-year mortgage, is recognized as an asset because the borrower is legally obligated to make payments over time. These loans often generate interest income for the bank, and the market value of these loans may be determined by what others are willing to pay for them. This practice is common in the primary and secondary loan markets. Banks must also prepare for potential defaults, as a high default rate can greatly reduce a bank's assets and net worth.