Note with index-linked principal

Company A purchases a five year interest free equity-index-linked note, with an original issue price of €10, for its market price of €12. At maturity, the note requires payment of the original issue price of €10 plus a supplemental redemption amount that depends on whether a specified stock price index exceeds a predetermined level at the maturity date. If the stock index does not exceed the predetermined level, no supplemental redemption amount is paid. If it does, the supplemental redemption amount equals the product of €1.15 and the difference between the level of the stock index at maturity and original issuance divided by the level at original issuance. A has the positive intention and ability to hold the note to maturity.

The note can be classified as a held-to-maturity investment because it has a fixed payment of €10 and fixed maturity and there is the positive intention and ability to hold it to maturity. However, the equity index feature is a call option not closely related to the debt host which must be separated as an embedded derivative . The purchase price (initial fair value) of €12 is allocated between the host debt instrument and the embedded derivative – the latter will have a non-zero fair value because it is an option-based derivative. [IAS 39.B.13].

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