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 2
| User | Comment |
|---|---|
| Mikehuynh | Retiring bonds: price paid > book value => extraordinary loss price paid < book value => extraordinary gain |
| lordutra | don't forget that extraordinary gains don't exist anymore under us gaap or ifrs! bonds early retirement now is just booked as non-operating income, i.e. between ebit and ebt |