Convertible debenture and derivatives

Question 1

Convertible debenture

Definition
Accounting

Answer 1

Loan that can be converted into share

Split accounting: part liability part equity.
Initally: Liabilities always at FV, Equity is the difference between cash received and liability.
Subsequently: Liability calc. at amortised cost, Equity stays the same

Amortised costs = using interest rate on similar debt

Question 2

Convertible debentures

Calculating liability

Answer 2

Initially at FV =
Discounted cash flow, use discount rate of standard loan %. Outgoings been interest payment per year.

Subsequent use = b/f + interest ( use post issue cost %) - interest paid = c/f

Question 3

Derivatives

Answer 3

(Asset or liability) Instrument to be settled at a future date with a value determined by an underlying asset. No initial investment, settlement at set intervals (yearly)

Always measured at FV
Gains/losses to P&L

Question 4

Derivatives

Options
Futures/swaps/forwards

Answer 4

Options - pay premium = financial asset at contract date then either nothing or asset at reporting date depending on value (cannot go to a liability)

Futures/swaps/forwards = pay nothing = BS$nil at contract date but either liability or asset at reporting date