A compound instrument,such as a convertible note,comprises two components.They are:
A) a financial liability (contractual arrangement to deliver cash or another financial liability) and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert it into a fixed number of ordinary shares of the entity).
B) a financial liability (contractual arrangement to deliver cash or another financial asset) and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert it into a fixed number of ordinary shares of the entity).
C) a financial liability (contractual arrangement to deliver cash or another financial asset) and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert it into a variable number of ordinary shares of the entity).
D) a financial liability (contractual arrangement to deliver cash or another financial asset) and an equity instrument (a put option granting the holder the right, for a specified period of time, to convert it into a fixed number of ordinary shares of the entity).

Question

Quizplus · Accepted Answer

A compound instrument such as a convertible note comprises of a financial liability which is a contractual arrangement to deliver cash or another financial asset and an equity instrument which is a call option granting the holder the right, for a specified period of time, to convert it into a fixed number of ordinary shares of the entity. Option B fits this definition. Option A is incorrect because it mentions a call option instead of a put option. Option C is incorrect because it mentions a variable number of ordinary shares instead of a fixed number. Option D is incorrect because it mentions a put option instead of a call option.

A Compound Instrument,such as a Convertible Note,comprises Two Components