What is the nature of a concessionary loan and how is it handled in the APV model?
A concessionary loan is a loan that is provided by a governmental body at below the normal market rate of interest like an enticement for an organization to make a capital investment that will economically benefit the lender. The advantage to the MNC is the difference among the face value of the concessionary loan transformed into the home currency and the present value of the likewise converted concessionary loan payments discounted at the MNC’s normal domestic borrowing rate. The loan payments will yield a present value less as compared to the face amount of the concessionary loan while they are discounted at the higher normal rate. This variation denotes a subsidy the host country is willing to extend to the MNC if the investment is made. The advantage to the MNC of the concessionary loan is handled in the APV model via a separate term.