On 1 July 20x1, A Ltd invested in S$1,000,000 of 5-year bonds issued by a Singapore company,
Question:
On 1 July 20x1, A Ltd invested in S$1,000,000 of 5-year bonds issued by a Singapore company, B Ltd, and properly accounted for the bonds at amortized cost. The bonds pay interest based on a floating interest rate benchmark on 30 June each year. On 1 July 20x1, A Ltd entered into an interest rate swap under which it pays the floating rate of a floating interest rate benchmark and receives a fixed interest rate of 3% per annum on 30 June each year for the purpose of risk management to hedge the interest rate risk associated with the investment in bonds. Which of the following statements is true?
None of the listed choices.
The hedged item is the interest rate swap.
A Ltd does not need to apply hedge accounting as it is a natural hedge.
The interest rate swap effectively converts the floating rate bonds to fixed rate bonds.
The interest rate swap effectively converts the fixed rate bonds to floating rate bonds.
Expert Answer:
The correct answer is The interest rate swap effectively converts the floating rate bonds to fixed r... View the full answer
