QUESTION 14 X Inc invested in 8% perpetual debt of face value of $ 10,000. How should this instrument be evaluated as an item of financial asset/liability assuming that the current market yield is 7%?


The perpetual debt instrument can be evaluated using the present value of the expected cash flows.

The expected cash flow from this instrument is a perpetual stream of $800 per year (8% of $10,000). At a market yield of 7%, the present value of this cash flow stream can be calculated as follows:

PV = $800 / 0.07 = $11,428.57

Therefore, the carrying amount of this financial asset would be $11,428.57 and it would be recorded at this amount on the balance sheet. If the market yield changes, the carrying amount of the financial asset would also need to be re-evaluated based on the new yield.

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