When Convertible Debt Is Not Converted at Maturity

question 50

Multiple Choice

When convertible debt is not converted at maturity

• A)a gain or loss is recorded for the difference between the book value of the debt and the present value of the cash flows.
• B)the amount originally allocated to equity is recorded as a gain on retirement.
• C)the amount allocated to the equity component at the issuance date is recorded as a loss on retirement.
• D)the carrying value of the bond equals its face value and it is removed from the books.

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Definitions:

Exchange Gain

A profit resulting from holding or transacting in foreign currencies as exchange rates vary.

Spot Rate

The existing selling or buying price of a certain currency for transactions that are completed right away.

Fair-Value Hedge

A hedge that is used to mitigate the risk of changes in the fair value of an asset, liability, or an unrecognized firm commitment.

Cost of the Hedge

The expenditure associated with implementing and maintaining a hedge against financial risk.