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FAR > 5.03- Embedded Derivatives > Flashcards

5.03- Embedded Derivatives Flashcards

1
Q

What are the two inherent risks in investing in BONDS?

A
  • Credit risk

- Market risk

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2
Q

What is a CONVERTIBLE BOND? What is it considered?

A
  • A bond that can be converted into stock.

- Considered a hybrid instrument

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3
Q

In a CONVERTIBLE BOND, what is the HOST INSTRUMENT? What is the EMBEDDED DERIVATIVE?

A
  • The bond

- The conversion feature (ability to go from bond to stock)

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4
Q

If the HOST INSTRUMENT is reported at FAIR VALUE, what is the EMBEDDED DERIVATIVE reported at?

A

Fair value

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5
Q

If the HOST INSTRUMENT is NOT reported at FAIR VALUE, what happens to the EMBEDDED DERIVATIVE?

A

it is BIFURCATED and accounted for separately.

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FAR (32 decks)

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