Help - Passive investments

Hi Brave ones, I’ve just started my FRA readings and…surprise…already asking AF for help. - an example of passive investments of schweser (2009 - B2 - P117) is calculating the interest revenue of a discount bond using the coupon rate*face value of bond for both Held-for-trading & Available-for-sale categories. - they only use market rate at issuance*beginning book value for Held-to-maturity. I thought that we would always use market rate at issuance*book value at beginning of period Can anyone please help…or am I missing an “easy” one. thanks tigas

‘Held to Maturity’ investments are always kept on Balance Sheet at their historical cost. So, their Book Value never changes. Whereas, ‘Available for Sale’ investments are maintained on Balance Sheet at their Fair Value. So, their Book Value changes over periods. So, for Held to Maturity, we will calculate Interest Revenue as market rate at issuance*beginning book value for Held-to-maturity. And for Available for Sale, we will calculate Interest Revenue as market rate at issuance*current book value. Is this what you were asking?

Hi, Thanks for your post. For HTM category I understand that they always compute interest revenue by applying the market rate at issuance*book value at beginning of period. But for AVS and HFT categories they are computing it with coupon rate*par value…here is where I get lost… By this “rule” (and I saw a similar exercise on CFAI B2 P18 where they apply the same “rule”), I assume that on L1 we were always dealing with HTM investments as we always used “market rate at issuance*book value at beginning of period” for interest revenue/expense (as far as I remember) I’ll continue digging a bit more…

Hi Tigas, For HTM, since they are carried at the same historical cost on BS through out, any reported Interest Revenue, also needs to take care of the difference between their buying cost and the par value. To take care of this amortization, Revenue from them is reported at market rate at issuance * their fixed book value. But for AVS and Trading Securities, they are already reported at their fair value in B/S. So, there is no need of any additional amortization amounts to be reported in I/S. That is why, their Interest Revenue is reported in I/S as what they actually pay. That is Coupon rate * Par Value. Hope this helps.

Hi Rus1bus, Thks again. Your reasoning for AVS and HFT really helped me understand it. For HTM it was “harder” but got it. They will use carrying value. This is the hard path of cfa, to understanding and not to memorize, despite “desperate” situations.