CMOS Chips is hedging a $20-$year, $$10$ million, $7\%$ bond payable with a $20-$year interest rate swap and has designated the swap as a fair value

hedge. The agreement called for CMOS to receive payment based on a $7\%$ fixed interest rate on a notional amount of $$10$ million and to pay

interest based on a floating interest rate tied to SOFR. The contract calls for cash settlement of the net interest amount on December $31$ of each

year.

At December $31,2024,$ the fair value of the derivative and of the hedged bonds has increased by $$100,000$ because interest rates declined

during the reporting period.

Required:

Does CMOS have an unrealized gain or loss on the derivative for the period? On the bonds? Will earnings increase or decrease due to the

hedging arrangement? Why?

Suppose interest rates increased, rather than decreased, causing the fair value of both the derivative and of the hedged bonds to decrease

by $$100,000.$ Would CMOS have an unrealized gain or loss on the derivative for the period? On the bonds? Would earnings increase or

decrease due to the hedging arrangement? Why?

Suppose the fair value of the bonds at December $31,2024,$ had increased by $$110,000$ rather than $$100,000,$ with the additional increase in

fair value due to investors' perceptions that the creditworthiness of CMOS was improving. Would CMOS have an unrealized gain or loss on the

derivative for the period? On the bonds? Would earnings increase or decrease due to the hedging arrangement? Why?

Suppose the notional amount of the swap had been $$10\mathrm{.}5$ million, rather than the $$10$ million principal amount of the bonds. As a result, at

December $31,2024,$ the swap's fair value increased by $$105,000$ rather than $$100,000.$ Would CMOS have an unrealized gain or loss on the

derivative for the period? On the bonds? Would earnings increase or decrease due to the hedging arrangement? Why?

Suppose BIOS Corporation is an investor, having purchased all $$10$ million of the bonds issued by CMOS as described in the original

situation above. BIOS is hedging its investment, classified as available$-$for$-$sale, with a $20-$year interest rate swap and has designated the swap

as a fair value hedge. The agreement called for BIOS to make payment based on a $7\%$ fixed interest rate on a notional amount of $$10$ million

and to receive interest based on a floating interest rate tied to SOFR. Would BIOS have an unrealized gain or loss on the derivative for the

period due to interest rates having declined? On the bonds? Would earnings increase or decrease due to the hedging arrangement? Why?