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Dear Tutor,
Investment in debt instruments can be measured by amortized method and one condition is that “Contractual terms give rise on specified dates to cash inflow that are solely interest and principle payment.
Firstly can you explain or elaborate it bit?
Secondly does convertible bonds (asset) fulfill this criteria because in study text it is written that it is not solely interest and principle payments.
Regards
Hi,
1. If you invested in a redeemable bond that pays an annual coupon rate of interest then it meets the contractual cash flow test as it consists of interest and principle payment (being the repayment of the bond in cash).
2. If you invest in convertible bonds then they do not meet the criteria because of the option to convert to shares on redemption, which is not a cash payment.
Hope this helps.
Thanks
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