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accounting for investments
Questions and Answers of
Accounting For Investments
What is meant by “a floor” on an interest rate contract?
Can an interest rate floor contract be terminated before maturity? If so, how will the termination fees be arrived at?
When does an interest rate floor become “in the money” and when does it become “out of the money”?
What are the two types of interest rate floor contracts? Which type of contract gives the buyer protection from a fall in interest rates?
What are the significant events in the trade life cycle of an interest rate floor contract?
What are the benefits of an interest rate floor contract?
What are the risks associated with an interest rate floor contract?
Write the journal entry for accounting for the premium on the trade in an interest rate floor contract.
What are all the factors that should be considered for calculating an interest rate floor premium?
Floors are purchased for a ____.a) Discountb) Premiumc) Market rated) None of the above
If the reference rate is below the floor rate, the payment is based upon the difference between _____.a) The two ratesb) The length of the periodc) The contract’s notional amountd) All of the above
An interest rate floor enables variable rate investors to retain the upside advantages of their variable rate investment while obtaining the comfort of a known _____.a) Maximum interest rateb)
It is important to understand that if interest rates do not fall below the______, you have not obtained any benefit from the purchase of the floor.a) Reference rateb) Reset ratec) Floor rated) None
An interest rate floor agreement is based on making a payment to the holder when a ________ falls below the specified floor rate, the length of the period and the contract’s notional amount.a)
To calculate the premium for a floor, several factors are considered, including the ____.a) Strike rateb) Notional amountc) Termd) All of the above
If the reference rate is above the________, then nothing is paid under the floor and no settlement takes place.a) Reference rateb) Reset ratec) Floor rated) None of the above
On termination, the floor will be _______and the original transaction is reversed.a) Renewedb) Rolled overc) Cancelledd) None of the above
In a floor–to pay contract, when the reference rate falls below the strike price then interest has to be _____.a) Receivedb) Deductedc) Paidd) None of the above
What is the meaning of an interest rate collar instrument?
Explain the benefits of an interest rate collar instrument?
What are the risks associated with an interest rate collar instrument?
What are the significant events in the trade life cycle of an interest rate collar instrument?
What is the meaning of an interest rate reverse collar instrument?
Can an interest rate collar instrument be designated as a hedging instrument?
An interest rate _________ is an instrument that gives you protection against rising rates by guaranteeing that you will never pay above a preagreed rate, but at the same time sets a downside (floor)
An interest rate collar protects you against increases in interest rates beyond a predetermined level known as the __________.a) Floor rateb) Cap ratec) Average rated) None of the above
An interest rate collar provides known upside protection against a rise in rates with the potential to benefit from a fall in rates, down to a ____________.a) Post-agreed levelb) Agreed levelc)
A collar protects a company against adverse movement in ____________.a) Exchange rateb) Bank ratec) Interest rated) None of the above
While recording the trade contingent, since an interest rate collar agreement is a notional amount and no physical exchange of money takes place, we record a __________ transaction to record the
The cost of the collar is referred to as the _________.a) Discountb) Premiumc) Exchange rated) None of the above
To calculate the interest rate collar premium, several factors are considered, including _________.a) Cap rateb) Floor ratec) Notional amountd) All of the above
On each reset date, interest will be received if the prevailing reference rate rises above the _________.a) Reference levelb) Floor levelc) Cap leveld) None of the above
A collar can be terminated anytime before the _________.a) Reset dateb) Settlement datec) Maturity dated) None of the above
An interest rate reverse collar is an instrument that gives you protection against _________.a) Rising interest rateb) Exchange ratec) Falling interest rated) None of the above
The reverse interest rate collar represents buying an interest rate _________.a) Capb) Floorc) Exchange rated) None of the above
The reverse interest rate collar represents selling an interest rate _________.a) Capb) Floorc) Exchange rated) None of the above
You will be exposed to interest rate movements if the term of the reverse collar is __________ than that of the underling facility.a) Longerb) Higherc) Shorterd) None of the above
In a reverse collar interest rate if the reference rate falls below the floor rate, interest will be _________.a) Paidb) Receivedc) Rolled overd) None of the above
An interest rate collar is _________.a) Writing a floor and writing a capb) Buying a cap and writing a floorc) An option on a futures contractd) Buying a cap and buying a floore) None of the above
What is a cross-currency swap and how is it different from an interest rate swap?
Enumerate the features of an interest rate cross-currency swap.
What are the benefits of a cross-currency interest rate swap?
What are the major risks associated with a cross-currency interest rate swap?
What are the three types of cross-currency interest rate swaps?
Can a cross-currency interest rate swap be designated as a hedging instrument?
Enumerate the significant events in the trade life cycle of a crosscurrency interest rate swap.
“The termination fee in any cross-currency interest rate swap includes the fx gain or loss on the position.” Elucidate.
Cross-currency swaps are an effective solution to long-term:a) Interest rate hedging needsb) Currency hedging needsc) Market hedging needsd) None of the above
Tenure of cross-currency swap ranges from one to __ years.a) 5b) 10c) 15d) 20
Cross currency swaps are suitable for ________ who has loans denominated in one currency, while its revenues are denominated in a different currency.a) Governmentb) Privatec) Corporated) None of the
Cross-currency interest-rate swaps allow the firm to switch its _____ from one currency to another.a) Bondb) Equityc) Loand) None of the above
Different types of risk involved in cross-currency swaps are ________.a) Interest rate riskb) Credit riskc) Currency riskd) All of the above
A cross-currency swap transaction is recorded as ________.a) A profit or loss itemb) A balance sheet itemc) An off balance sheet itemd) None of the above
In a cross-currency swap the interest is prefixed for the next quarter based on the ________.a) Market rateb) Exchange ratec) Benchmark rated) None of the above
The net present value of the trade at the time of entering into the contract is also known as the ______on the trade.a) Premiumb) Discountc) Leveraged) None of the above
Define a fixed income security.
What is meant by bond maturity and bond pricing?
What are the different yield measures usually identified by an investor?
What is meant by bond duration?
What is meant by corporate bond and municipal bond?
What are the risks associated with an investment in bonds?
What are financial instruments? How are those categorized as per the accounting standard?
What are the four categories of financial instruments? Enumerate the major changes made in the realm of financial instruments through IFRS 9.-IFRS 9 is the first part of Phase 1 of the IASB’s
What is accrued interest on bonds purchased and how is it accounted for?
How do you categorize an asset as held for “fair value through profit or loss”?
List the major events in the trade life cycle of an investment made in a fixed income security held for trading purposes.
What is the amortized cost of a bond and how is it accounted for?
How is interest calculated based on amortization and how is it accounted for in the books?
What differentiates a “dirty price” from a “clean price”?
What is the liquidation methodology used in the sale of a bond?
For an investment in bonds, the cash interest earned in each interest period is _____a) The same amount regardless of whether the bond was sold at par, a discount, or a premium.b) Different depending
If a bond having a face value of $100 was sold at S$94, the stated rate of interest would be ______a) Equal to the market rate on date of issuance.b) Not related to the market rate on date of
Accrued interest _____a) Is the difference between the dirty price and clean price.b) Must be paid by the buyer of the bond and remitted to the seller of the bond.c) Must be paid to the buyer of the
The actual price of a bond that a buyer would pay is equal to ____a) The asked price plus accrued interest.b) The asked price less accrued interest.c) The bid price plus accrued interest.d) The bid
Classification of debt instruments under IAS 39 includes the following, except _____a) Fair value through profit or loss (FVPL).b) Available-for-sale (AFS).c) Held-to-maturity (HTM).d) Loan and
Unrealized capital gain or losses for bonds under the “trading” category are reported under ______a) Income/loss on the income statement.b) Other comprehensive income.c) Dividend income.d) Netted
On liquidation of the bond the profit or loss is ascertained by _____a) Deducting the cost of sales (excluding interest) from the net sale consideration.b) Deducting the cost of sales (including
Under the incremental value method, the mark-to-market entry is reversed _____a) On T + 2 days.b) At the end of the accounting period.c) On the next valuation date.d) None of the above.
What is meant by available-for-sale securities? When would you classify an investment as available-for-sale?
What are the major differences between trading securities and available-for-sale securities?
How is the classification of “available-for-sale” affected with the introduction of IFRS 9?
How is the foreign exchange translation impact on available-for-sale bonds treated in the books of accounts? Is this any different from equity securities? If so, explain why it is so.
How is the impairment of available-for-sale bonds treated and presented in the balance sheet?
How is the unrealized currency gain or loss recorded in the book of accounts?
How is the realized capital gain or loss recorded in the book of accounts on the settlement date?
Enumerate the significant events in the trade life cycle of an investment classified as an available-for-sale security.
Available-for-sale bonds are debt investments that will be held:a) Until maturity.b) For a predefined period.c) Only until the current financial year.d) For an indefinite period of time.
The unrealized gain or loss for available-for-sale bonds is:a) Recorded as an adjustment to the equity on the balance sheet.b) Not recorded in the balance sheet.c) Recorded as earnings in P&L for the
When the bonds are sold then the realized gain is recorded in:a) Other comprehensive income (OCI).b) Not recorded in the balance sheet.c) Not recorded at all in the books.d) Taken directly to profit
Impairment other than temporary with respect to bonds under available-for-sale should be:a) Written down to fair value.b) Treated alike as temporary impairment.c) Considered a loss and to be treated
For bonds classified as available-for-sale, which of the following items will be reported in the income statement of the current period?a) Both realized and unrealized gains.b) Realized gain alone.c)
What are the criteria for classifying a security as held-to-maturity?
What is meant by a “tainting rule” and what are the exceptions to it?
Elucidate the revised criteria for measurement as amortized cost in the light of IFRS
Is US GAAP proposal significantly different from this?
What is meant by “effective interest rate”? What aspects should be considered for arriving at the effective interest rate?
Enumerate the significant events in the trade life cycle for an investment in fixed income security.
What is meant by amortization of premium or discount on purchase of a fixed income security?
Explain what is meant by yield-to-maturity in the context of investment in a fixed income security.
As per US GAAP, changes in fair value for held-to-maturity bonds is reported in:a) The income statement.b) Other comprehensive income.c) No need to report.d) None of the above.
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