CFA Practice Question

CFA Practice Question

Which of the following is most likely correct?
A. An Extraordinary Gain is likely when interest rates are low, and therefore prices of Bonds issued earlier are high.
B. If a Bond is paid off (retired early), then the difference between the price paid by the firm (to retire the bond) and the market value of the bond is an 'Extraordinary Loss' or 'Extraordinary Gain'.
C. When a convertible bond is converted into common stock, there is a decrease in liabilities equal to the carrying value of the bond and an equal increase in stockholders' equity.
Explanation: If a Bond is paid off (retired early), then the difference between the price paid by the firm (to retire the bond) and the carrying value (stated book value) of the bond of the bond is an 'Extraordinary Loss' or 'Extraordinary Gain'. An Extraordinary Gain is likely when interest rates are high, and therefore prices of Bonds issued earlier are low.

User Contributed Comments 1

User Comment
Mikehuynh Retiring bonds: price paid > book value => extraordinary loss
price paid < book value => extraordinary gain
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