CFA Level I · CFA Level I Exam · Topics in Long-Term Liabilities and Equity
Market interest rates rise after a company issues fixed-rate bonds, and the company measures the bonds at amortized cost under IFRS. The most likely effect on the reported liability is that its carrying amount:
The carrying amount continues to follow the effective interest method using the original market yield at issuance. Changes in market rates do not alter the amortized cost liability, although the fair value, which falls when rates rise, may be disclosed in the notes.
- Ais written down to the new market value
- Bcontinues to follow the effective interest method based on the original market yieldCorrect
- Cis remeasured each period using the new market yield
Explanation
At amortized cost, the carrying amount is based on the effective rate set at issuance. Later market rate changes do not change it, though fair value disclosure may differ. Remeasurement would apply only under the fair value option.
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