AFM291-ch09

AFM291-ch09 - Investments Chapter 9 AFM 291 chapter 9 1...

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
AFM 291 chapter 9 1 Chapter 9                                                 Investments Investments
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
AFM 291 chapter 9 2 Investments Investment Motivations Returns Strategy Accounting for investments Type of investment Debt Equity Management intent Ability to reliably measure fair value Extent of influence over the investee company
Background image of page 2
AFM 291 chapter 9 3 Fair Value Issues Investments generally recognized at their fair value at acquisition (usually purchase price) Also, many investments are adjusted to fair value at the balance sheet date Unrealized holding gains or losses occur when a financial instrument is adjusted to its fair value
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
AFM 291 chapter 9 4 Accounting Models There are three main models of accounting for investments: Cost/amortized cost model Fair value through net income model (FV- NI) Fair value through other comprehensive income model (FV-OCI)
Background image of page 4
chapter 9 Accounting Models: Summary Category (IFRS Model) Valuation at acquisition Transaction costs Valuation after acquisition Unrealized holding gains/ losses ----- Realized gains/losses Impairment losses Cost / amortized cost At fair value (cost/FV + transaction costs) Capitalize At amortized cost Not applicable ----- Recognize in net income Recognize in net income; reversal is not allowed (IFRS9/IAS39 allows reversal through NI) Fair Value through Net Income (FV-NI) At fair value (cost/FV) Expense immediately At fair value Recognize in net income ----- Recognize in NI Not applicable (why?) Fair Value through Other Comprehensive Income (FV- OCI) – equity only, no debt - ( this model not allowed in ASPE / PE GAAP ) At fair value (cost/FV + transaction costs) Capitalize At fair value or at amortized cost if fair value is not available Recognize as OCI ----- transfer total realized to NI (recycling) or to retained earnings directly (without recycling) Recognize in net income and transfer all unrealized losses from AOCI (IFRS9/IAS39 allows reversal through NI)
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
AFM 291 chapter 9 6 Bond valuation Sell at par if coupon = yield Sell at a premium if coupon > yield Sell at a discount if coupon < yield Why? Yield derives from three components: 1. price 2. payment of principal at maturity 3. interest payments, typically semi-annually (based on coupon)
Background image of page 6
AFM 291 chapter 9 7 Bond example Purchased 100, $1,000 bonds issued on January 1, 2011 with a coupon of 7% and maturity in 10 years. The effective interest rate is 6%. Interest is paid semi-annually , on July 1 and January 1. Value of the bond at issuance = PV payment of principal ($1,000) at maturity + PV interest payments ( $35 every 6 months)
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
AFM 291 chapter 9 8 Present Value Formulas The present value of $1 received n periods from today with an interest rate of i is: (Present Value of a Single Sum, Table A-2, page 812) The present value of receiving $1 for n periods at an interest rate of i is: (Present Value of an Ordinary Annuity, Table A-4, page 814) PVF = 1/(1 + i) n PVF A = 1 i 1 - 1 ( 1 + i ) n
Background image of page 8
AFM 291 chapter 9 9 Bond Price - PV
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/10/2010 for the course AFM 291 taught by Professor Clark during the Spring '10 term at Waterloo.

Page1 / 55

AFM291-ch09 - Investments Chapter 9 AFM 291 chapter 9 1...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online