Exam 13: Marketable Securities and Derivatives

The U.S.government will pay Bringle $2,500,000 each six months, equal to 2.5% of the $100 million face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will repay the $100 million at the end of five years.At the time Bringle purchases the bonds, the market prices these bonds to yield Bringle 6% annually (3% each six months).The bonds are classified as held to maturity.Bringle will record the following entry.

Which of the following is not a derivative?

Measurement of trading securities at fair value reflects income when it occurs in the form of a change in fair value, not when the investor realizes a gain or loss at the time of sale.

DPC, an electric utility, has $100 million of bonds payable outstanding that mature in five years.The utility acquires U.S.government securities whose periodic interest payments and maturity value exactly equal those on the utility's outstanding bonds.The firm intends to use the cash received from the government bonds to make required interest and principal payments on its own bonds.The electric utility could also have used its cash to purchase its bonds in the marketplace.Based on the above, DPC should treat these securities as