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Concessionary loan with APV model

State nature of the concessionary loan and explain how it is handled within the APV model?

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Concessionary loan is the loan provided by the governmental body at interest rate below the normal market rate as an enticement for the firm in order to form the capital investment which will benefit the lender economically.  Benefit to MNC is the difference between face value of the concessionary loan changed into the home currency and present value of the similarly changed concessionary loan payments discounted at the MNC’s normal domestic borrowing rate. Loan payments will produce the present value less than the face amount of the concessionary loan when they are discounted at the higher normal rate.  This difference represents a subsidy the host country is wishing to extend to the MNC in case the investment is made.  Benefit to the MNC of concessionary loan is handled in the APV model through the separate term.

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