What Are The Characteristics of A Bond Investment? Answer

1. What are the characteristics of a bond investment?
ANSWER:
Debt securities normally have the following characteristics:
a. maturity value
b. maturity date
c. periodic interest payments based on stated rate
2. Based on IFRS 9, what are the classifications of investment in debt securities?
Explain.
ANSWER:
An entity shall classify financial assets as subsequent measured at amortized
cost, fair value through profit or loss, or fair value through other comprehensive
income based on both:
 The entity business model for managing the financial assets; and
 The contractual cash flow characteristics of the financial assets.
IFRS 9, the new standard, requires debt securities to be classified mainly into
those carried at:
a. Amortized cost
Debt investment at amortized cost is initially recognized at
purchase price which is the fair value at the date of acquisition plus
transaction costs that are directly attributable to their acquisition. After
the initial recognition, at interest dates and at reporting dates, any
premium or discount is amortized using the effective interest method.
Any fair value at the end of the reporting period is to be ignored.
b. Fair value through profit or loss (FVTPL)
Debt investment at fair value through profit or loss (FVTPL) is
initially recorded at cost (purchase price which is generally its fair
market value at the date of acquisition). Any transaction cost directly
attributable to its acquisition does not form part of the cost of investment
and is recorded as an expense. The discount or premium on
investments classified as debt securities at fair value through profit or
loss is not subject to amortization.
c. Fair value through other comprehensive income (FVOCI).
Debt investment at fair value through other comprehensive income
(FVOCI) is initially recognized at purchase price which is the fair value
at the date of acquisition plus transaction costs that are directly
attributable to their acquisition. After the initial recognition, at interest
dates and at reporting dates, any premium or discount is amortized
using the effective interest method. At the reporting date, the debt
investments are measured at fair value.
3. What is the business model and cash flow characteristics of a bond investment
for it to be classified as financial asset at amortized cost?
ANSWER:
The business model and cash flow characteristics of a bond investment
for it to be classified as financial asset at amortized cost are:
 The financial assets are held within a business model whose objective is
to hold financial asset to collect; and
 The contractual terms of the financial asset give rise on specified dates to
cash flow that are solely payments of principal and interest (SPPI) on the
principal amount outstanding.
4. What is the initial measurement of investment in debt securities?

ANSWER:
Debt investment at amortized cost is initially recognized at purchase
price which is the fair value at the date of acquisition plus transaction costs that
are directly attributable to their acquisition.
Debt investment at fair value through profit or loss (FVPL) is initially
recorded at cost (purchase price which is generally its fair market value at the
date of acquisition). Any transaction cost directly attributable to its acquisition
does not form part of the cost of investment and is recorded as an expense.
Debt investment at fair value through other comprehensive income
(FVOCI) is initially recognized at purchase price which is the fair value at the
date of acquisition plus transaction costs that are directly attributable to their
acquisition.
5. What is the difference between bond premium and bond discount?

ANSWER:
A bond that is trading above its par value (original price) in the
secondary market is a premium bond. A bond will trade at a premium when it
offers a coupon (interest) rate that is higher than the current prevailing interest
rates being offered for new bonds.
A bond currently trading for less than its par value in the secondary
market is a discount bond. A bond will trade at a discount when it offers
a coupon rate that is lower than prevailing interest rates. Since investors want
a higher yield, they will pay less for a bond with a coupon rate lower than the
prevailing rates—the upfront discount makes up for the lower coupon rate.
A premium bond has a coupon rate higher than the prevailing interest
rate for that bond maturity and credit quality. A discount bond, in contrast, has
a coupon rate lower than the prevailing interest rate for that bond maturity and
credit quality.
6. What is the effect of amortizing bond premium and bond discount on interest
income?
ANSWER:
Amortization of bond premium and bond discount will have an effect on
the interest income, which are decrease and increase, respectively.
Such process of allocating the bond premium as deduction from the
interest income and the bond discount as addition to interest income is what is
traditionally called amortization.
7. Why is there a need to amortize discount or premium?

ANSWER:
When bonds are sold at a discount or at a premium, the interest rate is
modified from the face rate to an effective rate close to the market rate at the
time the bonds were issued. As a result, bond discounts or premiums have the
effect of increasing or decreasing the bond's interest expense over time. Under
these conditions, it is necessary to amortize the discount or premium over the life of
the bonds by using either the straight-line method or the effective interest method.
8. What are convertible bonds?

ANSWER:
A convertible bond is a fixed-income corporate debt security that yields
interest payments but can be converted into a predetermined number of
common stock or equity shares. It offers investors a type of hybrid security that
has features of a bond, such as interest payments, while also having the option
to own the underlying stock.
9. Based on IFRS 9, how do we reclassify bond investment at fair value to

amortized cost?
ANSWER:
Reclassification shall be made when and only when an entity changes
its business model for managing its financial assets. We reclassify bond
investment at fair value to amortized cost through;
a. From Fair Value through Other Comprehensive Income
The accumulated unrealized gain/loss and fair value adjustment
balance (amounts are the same), are eliminated in the accounts. The
new debt investment (at amortized cost) is recorded at the amount of
the FVOCI, and the same effective interest rate is used, as if it had been
designated at amortized cost from the date of initial recognition.
b. From Fair Value through Profit or Loss
The new debt investment (at amortized cost) is recorded at fair
value, that serves as the initial cost and an effective interest rate is
calculated based on the fair value on the date of reclassification.
10. Based on IFRS 9, how do we reclassify bond investment at amortized cost to

fair value?
ANSWER:
Reclassification shall be made when and only when an entity changes

its business model for managing its financial assets. We reclassify bond
investment at amortized cost to fair value through:
a. To Fair Value through Other Comprehensive Income
The new debt investment (FVPL) is recorded at fair value and the
difference between fair value and amortized cost is taken to profit or loss.
b. To Fair Value through Profit or Loss
The new debt investment (FVOCI) is recorded at fair value and the
difference between fair value and amortized cost is taken to other
comprehensive income. The effective interest rate used as debt investment at
amortized cost remains the same.

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1. What are the characteristics of a bond investment?

4. What is the initial measurement of investment in debt securities?

5. What is the difference between bond premium and bond discount?

7. Why is there a need to amortize discount or premium?

8. What are convertible bonds?

9. Based on IFRS 9, how do we reclassify bond investment at fair value to

10. Based on IFRS 9, how do we reclassify bond investment at amortized cost to

Reclassification shall be made when and only when an entity changes

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