Chapter 10 - Liabilities And Funding

Question 1

What are the ways financial liabilities can be classified

Answer 1

As FVTPL if they are held for trading, to eliminate an accounting mismatch, hedging

Or at amortized cost if none of the above apply

Question 2

What is a convertible debt liability double entry

What happens if there are transaction costs

Answer 2

Dr Cash

Cr Bond liab

Cr convertible bond reserve (Bal)

Transaction costs must be removed on a pro-rata basis from debit and credit

Question 3

How do you calculate the value of a convertible bond liability credit entry

Answer 3

PVFCF using the yield of an identical bond without the conversion option

Question 4

What are the 3 conditions an embedded derivative liability should be separated from the host contract

Answer 4

1) the combined instrument instrument has NOT been designated as FVTPL

2) a seperate instrument of the embedded derivative would meet the definition of a derivative

3) the host and embedded derivative are NOT closely connected - list in course notes

Question 5

How can a bank improve its stable funding (2)

Answer 5

Issue debt securities

Attract more retail customers