Accounting for Investments, Volume 2: Fixed Income Securities and Interest Rate Derivatives—A Practitioner's Guide

QUESTIONS

Theory questions

1. What is accrued interest on bonds purchased and how is it accounted for?

2. How do you categorize an asset as held for “fair value through profit or loss”?

3. List the major events in the trade life cycle of an investment made in a fixed income security held for trading purposes.

4. What is the amortized cost of a bond and how is it accounted for?

5. How is interest calculated based on amortization and how is it accounted for in the books?

6. What differentiates a “dirty price” from a “clean price”?

7. What is the liquidation methodology used in the sale of a bond?

Objective questions

1. 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 upon the date of sale.

c) Not the same amount when the contractual interest and the yield are different.

d) Dependent on the amount of accrued interest charged to the buyer at the time of the trade.

2. 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 issuance.

c) Higher than the market rate on date of issuance.

d) Lower than the market rate on date of issuance.

3. 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 ...