8. Net finance costs
Finance costs and exchange gains/(losses) are presented net of effective cash flow hedges for respective interest bearing and foreign currency borrowings. Fair value gains/(losses) on derivatives, presented below, include the mark to market value changes of interest rate and currency derivatives designated as fair value hedges, net of fair value changes in the associated hedged risk; and fair value changes of non-hedge derivatives of non-operating items.
| US$ million | Before special items and remeasurements 2007 | After special items and remeasurements 2007 | Before special items and remeasurements 2006(1) | After special items and remeasurements 2006(1) |
|---|---|---|---|---|
| Investment income | ||||
| Interest and other financial income | 323 | 323 | 266 | 266 |
| Expected return on defined benefit arrangements | 257 | 257 | 234 | 234 |
| Foreign exchange gains | 68 | 68 | 38 | 78 |
| Dividend income from financial asset investments | 36 | 36 | 13 | 13 |
| Fair value gains on derivatives | – | 34 | – | 10 |
| Other fair value gains | – | 24 | 8 | 8 |
| Total investment income – continuing operations | 684 | 742 | 559 | 609 |
| Interest expense | ||||
| Amortisation discount relating to provisions | (36) | (36) | (30) | (30) |
| Interest and other finance expense | (565) | (565) | (378) | (378) |
| Unwinding of discount on convertible bonds | – | – | (4) | (4) |
| Interest on defined benefit arrangements | (229) | (229) | (226) | (226) |
| Foreign exchange losses | (9) | (12) | (19) | (20) |
| Dividend on redeemable preference shares | (9) | (9) | (22) | (22) |
| Fair value losses on derivatives | (1) | (22) | (2) | (8) |
| Other fair value losses | (14) | (19) | – | (4) |
| (863) | (892) | (681) | (692) | |
| Less: interest capitalised | 42 | 42 | 12 | 12 |
| Total interest expense – continuing operations | (821) | (850) | (669) | (680) |
| Net finance costs – continuing operations | (137) | (108) | (110) | (71) |
(1) Comparatives have been adjusted to exclude amounts relating to discontinued operations.
The weighted average interest rate applicable to interest on general borrowings capitalised for continuing operations was 11.4% (2006: 7.8%). Financing special items and remeasurements are set out in note 7.