FINANCIAL ACCOUNTING & REPORTING 1

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Other Types of Investments and Basic Concepts of Derivatives

Module 015 Fund and other types of

investments and derivatives

Welcome to the starting point for learning about Fund and other types of
Investments & Derivatives.
Funds are a sort of collective investment; you are combining your money
alongside other investors who want to invest in a specific fund.
Derivatives are becoming increasingly common but very complicated. Huge
losses may be suffered by banks and other financial institutions because of
too much exposure to derivative financial instruments.
At the end of this module, you will be able to:
1. Be familiar with funds and cash surrender value of life insurance
2. Know the accounting rules for fund and cash surrender value
3. Recognize common financial product terminology and how these terms
are applied
4. Recognize the importance of derivatives when trading securities
5. Explain the definition of a derivative and when the definition is met
6. Identify common types of derivatives
7. Be familiar with basic rules in accounting for derivative transactions
under PAS No. 39

The common application of the lessons that are under this module consists of
accounting for different types of funds and familiarizing yourself with some
basic financial concepts in connection with derivatives.

Investment in funds
Definition of fund
The fund is defined as cash and other assets set aside for a specific purpose either
by reason of the action of management or by virtue of a contract or legal
requirement. This may be in the form of cash, securities, and other assets.
This may be for a current or noncurrent purpose. Funds for current purposes
include petty cash fund, payroll fund, interest fund, dividend fund, and tax fund.
Such funds are classified as current assets. Funds for noncurrent purposes include
sinking fund, preference share redemption fund, replacement fund, plant expansion
fund, contingency fund, and insurance fund.

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Measurement of fund
The long-term fund shall be carried in the amount of cash plus the amortization and
other assets in the fund.
Sinking fund
A sinking fund or redemption fund is a fund set aside for the liquidation of long-
term debt, more particularly long-term bonds payable. The accounting for a sinking
fund depends on whether the fund is under the administration of the entity or under
the charge of the trustee.
Fund under the administration of the entity
When a fund is under the administration of the entity, the entity records the fund
transactions currently and thus makes a distinction whether the fund is in the form
of cash, securities, and other assets.
Illustration
An entity records sinking fund transactions currently and maintains a balance in
retained earnings appropriated for the sinking fund account equal to the sinking
fund. There is no trustee.
2015
Dec 31 Transferred P2,000,000 cash to sinking fund:
Sinking fund cash 2,000,000
Cash 2,000,000
Dec 31 Appropriated retained earnings for an amount equal to the fund:
Retained earnings 2,000,000
Retained earnings-appropriated 2,000,000
Appropriation is not automatic; this is a matter of accounting policy.
2016
Apr 1 Invested sinking fund cash in P2,000,000 face value 12% bonds. The
purchase price is equal to the face value. Interest is payable semiannually on
April 1 and October 1
Sinking fund 2,000,000
Sinking fund cash 2,000,000
Oct 1 Received interest on the sinking fund securities, P120,000
Sinking fund cash 120,000
Sinking fund income 120,000
Dec 31 Transferred another P2,000,000 cash to the fund
Sinking fund cash 2,000,000
Cash 2,000,000
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Dec 31 Interest accrued on the sinking fund securities for three months,
P60,000 (P2,000,000x12%x3/12)
Accrued interest receivable 60,000
Sinking fund income 60,000
Dec 31 Appropriated retained earnings for an amount equal to the fund
Retained earnings 2,180,000
Retained earnings-appropriated 2,180,000

Sinking fund cash 2,120,000

Sinking fund securities 2,000,000
Accrued interest receivable 60,000
Total sinking fund 4,180,000
Les: Appropriated 2,000,000
Additional appropriation 2,180,000
2017
Jan 1 Reversal of the accrued interest on sinking fund securities:
Sinking fund income 60,000
Accrued interest receivable 60,000
April 1 Received semiannual interest on the sinking fund securities:
Sinking fund cash 120,000
Sinking fund income 120,000
July 1 Payment of fund expenses, P20,000
Sinking fund expense 20,000
Sinking fund cash 20,000
Oct. 1 Received the semiannual interest on the sinking fund securities
Sinking fund cash 120,000
Sinking fund income 120,000
Oct 1 Sold the sinking fund securities at 105 or P2,100,00
Sinking fund cash 2,100,000
Sinking fund securities 2,000,000
Gain on sale of securities 100,000

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 Dec 31 Transferred another P2,000,000 to the fund
Sinking fund cash 2,000,000
Cash 2,000,000
Dec 31 Appropriated retained earnings for an amount equal to the fund
Retained earnings 2,260,000
Retained earnings-appropriated 2,260,000

Sinking fund cash 2,260,000

Less: appropriated RE balance 4,180,000
Additional appropriation 2,260,000

2018
July 1 retired bonds payable of P5,000,000 plus accrued interest of P500,000
Bonds payable 5,000,000
Interest expense 500,000
Sinking fund cash 5,500,000
July 1 Return the residual sinking fund cash to the general fund
Cash 940,000
Sinking fund cash 940,000
July 1 release of the appropriated retained earnings balance to the
unappropriated balance:
Retained earnings-appropriated 6,440,000
Retained earnings 6,440,000

Fund under the administration of a trustee

If the fund is under the administration of a trustee, fund transactions are not
currently recorded by the entity. Individual transactions pertaining to the purchase
and sale of securities and to earnings and expenses of the fund are recorded by the
entity periodically when the report is received from a trustee. Moreover, no
distinction is made whether the sinking fund is in the form of cash, securities, or
other assets. The account 'sinking fund trustee is used.
Sinking fund contribution
The amount of periodic contribution to the sinking fund may be voluntary or
mandatory. It is voluntary if the sinking fund is the result of a discretionary action of
management. It is mandatory if the sinking fund is required by contract, usually
with bondholders.
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Annual contribution at the end of each year

What would be the annual contribution to the fund at the end of each year for 4
years in order to accumulate P1,000,000 at the rate of 12% compounded annually?
The first annual contribution was made on December 31, 2014, and every December
31 thereafter.
The annual contribution is simply computed by dividing the fund by the
accumulated by the future value of an ordinary annuity of 1. The future value of an
ordinary annuity at 1 at 12% for four years is 4.7793. thus, P1,000,000 divided by
4.7793 equals an annual contribution of P209,236.
Fund accumulation
Date Interest on fund Annual Fund balance
balance contribution
Dec. 31, 2015 209,236 209,236
Dec. 31, 2016 25,108 209,236 443,580
Dec. 31, 2017 53,230 209,236 706,046
Dec. 31, 2018 84,718 209,236 1,000,000
Interest on fund balance is equal to fund balance times interest rate. Thus, for 2016,
P209,236 times 12% equals P25,108 and so on.
There is no interest for 2015 because the first annual contribution was made on
December 31, 2015.
Annual contribution in advance
What would be the annual contribution to the fund at the beginning of each year for
4 years in order to accumulate P1,000,000 at the rate of 12% compounded
annually?
The first annual contribution is on January 1, 2015, and every January 1 thereafter.
In this case, the formula is to divide the fund to be accumulated by the 'future value
of an annuity of 1 in advance at 12% for four years. The future value of an annuity of
1 in advance at 12% for 4 years is 5.3528. Thus, P1,000,000 divided by 5.3528
equals an annual contribution of P186, 818.
Fund accumulation
Date Interest on Annual Fund balance
fund balance contribution
Jan 1, 2015 186,818 186,818
Jan 1, 2016 22,418 186,818 396,054
Jan 1, 2017 47,526 186,818 630,398
Jan 1, 2018 75,648 186,818 892,864
Dec 31, 2018 107,136 - 1,000,000

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One-time contribution
What would be the lump sum contribution on January 1, 2015, in order to
accumulate P1,000,000 at the rate of 12% compounded annually for 4 years?
In this case, the future value of 1 factor is necessary. The future value of 1 at 12% for
4 years is 1.5735. the lump sum contribution is also computed by dividing the fund
to be accumulated by the future value of 1 factor. Thus, P1,000,000 divided by
1.5735 equals P635,526.
Date Interest Fund balance
Jan 1, 2015 635,526
Dec 31, 2015 76,263 711,789
Dec 31, 2016 85,415 797,204
Dec 31, 2017 95,664 892,868
Dec 31, 2018 107,132 1,000,000
Classification of sinking fund
As a rule, a sinking fund is classified as a noncurrent asset. However, if the bond for
which the sinking fund was set aside becomes due within twelve months after the
end of the reporting period, the sinking fund is reclassified as a current asset. The
classification of a fund shall parallel the classification of the related liability.
The bond payable is reclassified as a current liability because it already matures
within twelve months after the end of the reporting period. Thus, the sinking fund is
also reclassified as a current asset.
Preference share redemption fund
The terms of the preference share issue may provide that the preference share may
be called in for redemption by the issuing entity. In such a case, the issuing entity
sets up a fund to ensure the eventual redemption of the preference share.
For example, if the entity sets aside P1,000,000 for the redemption of preference
share, the journal entry to record the establishment of the fund is:
Preference share redemption fund 1,000,000
Cash 1,000,000
If subsequently, 10,000 preference shares of P50 par value originally issued at par
are redeemed at the option of the entity at P53 per share, the redemption is
recorded as follows:
Preference share capital 500,000
Retained earnings 30,000
Preference share redemption fund 530,000
Fund for the acquisition of property
The future acquisition of property, plant and equipment may involve the setting
aside of a certain amount of cash. Such fund may be called 'replacement fund' or
'plant expansion fund.'
A replacement fund, as the title suggests, is cash set aside in anticipation of the
future replacement of the depreciable asset. On the other hand, a plant expansion
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fund is a cash set aside in anticipation of the future acquisition of additional

property because of an expanded or increased volume of operations.
Contingency fund
A contingency fund is a cash set aside for the purpose of meeting obligations that
may arise from contingencies like pending lawsuits or taxes in dispute.
For example, an entity is issued P500,000 damages by virtue of a breach of contract.
The attorneys for the entity are of the opinion that the entity has a good case.
However, the entity decides to set up a fund to meet the obligation in case of any
eventuality. If the entity sets aside P500,000 as a contingent fund, the journal entry
is:
Contingency fund 500,000
Cash 500,000
The suit is ultimately decided against the entity; the entity is required, however, to
pay only P300,000. The journal entry to record the payment is:
Loss on damages 300,000
Contingency fund 300,000
The balance of P200,000 in the contingency fund is then reverted to the general cash
account as follows:
Cash 200,000
Contingency fund 200,000
Insurance fund
An insurance fund is a cash set aside for the purpose of meeting obligations that
may arise from certain risks not insured against, such as fire, typhoon, explosion,
and other similar casualties.
The establishment of an insurance fund is the result of a policy of self-insurance,
which is actually a policy of "no-insurance." An entity may decide to self-insure on
the philosophy that in the long run, the cost of self-insurance would be less than the
cost of purchased insurance.
For example, if the entity makes an annual contribution to an insurance fund of
P200,000, the journal entry is:
Insurance fund 200,000
Cash 200,000

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 Subsequently, after five years, a building is completely destroyed by fire. At the time
of the fire, the building records show the cost of P4,000,000 and accumulated
depreciation of P1,500,000. The journal entry to record the fire loss is:
Fire loss 2,500,000
Accumulated depreciation 1,500,000
Building 4,000,000
A new building constructed at a total cost of P5,000,000 is recorded as follows:
Building 5,000,000
Insurance fund(200,000x5) 1,000,000
Cash 4,000,000
Investment in cash surrenders the value of life insurance
Cash surrender value
The entity may insure the life of its officers and name itself as a beneficiary. The
purpose of this arrangement is to compensate the entity for the loss of services
arising from the untimely death of important members of management. The
accounting for the payment of the insurance premiums will depend on whether the
beneficiary is the entity itself or the officer insured.
If the beneficiary is the officer insured or any person other than the entity like the
wife of the officer, no accounting problem is encountered because the payment of
the premium is simply charged to the insurance expense. An accounting problem
will arise when the beneficiary is the entity itself. It is on this assumption that the
following discussion is geared.
Under our law, a life insurance policy has a cash surrender value and loan value.
Cash surrender value is the amount that the insurance from will pay upon the
surrender and cancelation of the life insurance policy. Cash surrender value arises if
the following requisites are present:
a. The policy is a life policy. There is no cash surrender value in fire, accident, and
other non-life policies.
b. Premiums for three full years must have been paid.
c. The policy is surrendered at the end of the third year or anytime thereafter.

Thus, a cash surrender value legally commences accruing at the end of the third
year. However, there are certain insurance firms that sell life insurance policies that
grant cash surrender value even at the end of the second year only.
The cash surrender value is classified as a noncurrent investment. On the other
hand, a loan value is an amount that the insured can borrow from the insurance firm
with the cash surrender value as collateral security.
When an amount is borrowed from the insurance entity, it is treated as an ordinary
obligation. The loan shall not be deducted from the cash surrender value for
financial statement purposes.
Theory on the cash surrender value
The cash surrender value of a life policy arises from the fact that the fixed annual
premium is much in excess of the annual risk during the earlier years of the policy.
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The excess is necessary in order to balance the deficiency of the same premium to
meet the annual risk during the later years of the policy. Such excess in the premium
paid over the annual cost of insurance, with accumulated interest, constitutes the
cash surrender value.
Accounting procedures
The accounting procedures concerning the cash surrender value are as follows:
a. Payment of the insurance premium
Life insurance expense xx
Cash xx
b. Adjustment of the unexpired premium at the end of the period:
Prepaid life insurance xx
Life insurance expense xx
c. Dividends received on the life policy are not income but a reduction of life
insurance expenses.
Cash xx
Life insurance expense xx
d. Initial recognition of the cash surrender value at the end of the third year:
Cash surrender value xx
Life insurance expense xx
Retained earnings xx
The initial cash surrender value is regarded as applicable to three years of the life
policy. That portion of the cash surrender value applicable to the current year is
credited to life insurance expense, and that portion applicable to the prior years is
credited to retained earnings.
e. Recognition of cash surrender value subsequent to the third year
Cash surrender value xx
Life insurance expense xx
f. Receipt of the proceeds of the life policy:
Cash xx
Cash surrender value xx
Life insurance expense xx
Gain on life insurance settlement xx
The amount to be credited to the cash surrender value should be the adjusted
balance at the time of death of the insured.
The life insurance expense account is credited for the unexpired premium at the
time of death. The gain on life insurance settlement is determined as follows:

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 Face of policy xx
Less: Cash surrender value xx
Unexpired premium on life insurance settlement xx
Derivatives
Basic Financial Concepts
Recognized common financial product terminology and how these terms are applied
A long position is an asset that is purchased with the anticipation that it will
appreciate in value.
Ex: A purchase of a security with right of ownership
More information:
• Expectation that underlying assets will increase in price
• Asset cost=purchase price x quantity

Short position is the sale of a security that is not owned by the seller or that the
seller has borrowed. This is the negative liability position in the market.
Ex: Owing security or other financial instruments to another party. another party
More information:
• Borrowing or selling a security with intentions to buy back at a future date
and return the security to the lending party.
• Expecting the underlying assets to decrease in price
• Liability= current price quantity
• Proceeds= selling price x quantity
An exchange is an organized market where buyers and sellers meet to trade
securities. Exchanges help to regulate the type of securities purchased and sold. This
concept is especially important in regard to a listed security and an over-the-
counter (OTC) security. Listed security can be traded through the exchange, while
OTC security is not traded through the exchange. A common example is the New
York Stock Exchange, which is a formalized regulatory organization.
Examples of securities that are exchanged, traded, or OTC
Exchange-traded:
• Equities
• Options
• Futures
OTC:
• Options
• Forward
• Swaps
• Debt instruments
• Debt and equity placements
• Repurchase agreements
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Exchange-traded securities characteristics

• Standardized contracts
• Regulated by associations such as the securities exchange commissions,
National Futures Associations, and the Commodity Futures Trading
Commission
• Open to all investors
• Subject to registration requirements
• Considered interchangeable
OTC Traded securities characteristics
• Non-standardized and can be customized or tailored
• Traded outside of exchanges
• Traded in unregulated or ‘self’ regulated markets as:
- Inter-bank markets
- Negotiated contracts between counterparties/dealers
- Private placements
Trade date and settlement date are two important points in time when trading
securities.
The trade date is the date of a contractual obligation to buy or sell a security.
The settlement date is the date that cash transfers to settle a buy or sell
transaction-the actual day on which the transfer of cash or assets is completed.
A broker is a firm or an agent that purchases or sells securities on behalf of another.
Brokers may also provide a series of different services to their clients.
When buyers and sellers consider selling price or purchasing securities, there are
three pricing terms that apply.
The bid price is the price that buyers are willing to pay for a particular financial
instrument.
Mid-price is the price between the bid and ask price. When parties agree to the
mid-price, there typically is a trade.
Ask price is the price that sellers are willing to sell a particular financial instrument.

A derivative instrument (type of financial instrument) is a contract whose value is

based on the performance of an underlying financial asset, index, or other
investment. (Baron's Dictionary of finance and investment terms)

A derivative is defined as a financial instrument or other contracts within the scope

of PAS 39 if it has all three of the following characteristics:
(a) Its value changes in response to the change in a specified interest rate, financial
instrument price, commodity price, foreign exchange rate, index of prices or rates,
credit rating or credit index, or other variables, provided in the case of a non-
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financial variable that the variable is not specific to a party to the contract
(sometimes called the “underlying”);
(b) It requires no initial net investment or an initial net investment that is smaller
than would be required for other types of contracts that would be expected to have
a similar response to changes in market factors; and
(c) It is settled at a future date.

The term “underlying” is used in derivatives trading. A derivative is a financial

instrument whose price is based on or derived from another asset. The underlying
asset is the financial instrument from which a derivative's price is based. Common
underlying instruments include bonds, commodities, currencies, interest rates,
market indexes, and stocks.
Examples of underlying and notional amounts:

Derivative Underlying National

Foreign currency forward Exchange rate Number of currency units
Interest rate swap Interest index Stated reference amount
Currency swap Exchange rate Specified currency amount
Interest rate cap Interest index Stated reference amount
Commodity future Commodity price Number of commodity units
Stock option Stock price Number of shares

Reasons for using derivative

There are several different kinds of derivatives that have a variety of functions and
applications based on the particular type of derivative. As often is in the case in
trading, the more risk that is assumed, the more rewards that stand to be gained.
Derivatives can be used on both sides of the equation to either reduce risk or
assume risk with the possibility of commensurate reward.

• Speculation is the assumption of risk in hopes of achieving gains. It is the act

of trading an asset that may have a significant risk of losing money and
hoping for a profit from fluctuations in the market. With speculation, the
risk of loss is offset by the possibility of a huge gain.
• Hedging is an investment technique used to offset a potential loss on one
investment by purchasing a second investment with the expectation that it
will perform in the opposite way. Simply put, a hedge is used to reduce any
substantial losses or gains suffered by an investor. This strategy offsets a
given risk, such as interest rate or foreign currency. A perfect hedge is one
that eliminates the possibility of a future gain or loss. Hedging is often used
as a risk management tool.
• Arbitrage is the attempt to profit from the differences (including
inefficiencies) between different markets. It is basically buying in one
market and simultaneously selling in another to profit from the temporary
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difference. This type of trade profits by exploiting price differences of

identical or similar financial instruments in different markets.
• Leverage is obtaining economic exposure to securities or markets through
the use of borrowed funds with the hope that the income from the asset or
asset price appreciation will be more than the cost of borrowing.

Common derivatives include futures contracts, forward contracts, swaps,

options, and warrants.

A forward contract is a legal contract between two parties to purchase and sell a
specific quantity of a commodity, foreign currency, or other financial instruments at
a price specified with delivery and settlement at a specified future date. The purpose
of a forward contract is to lock in a price and quantity for the future delivery of the
item and is used in many of the same instances as futures contracts, but as they can
be tailored to a specific quantity and settlement date, an element of flexibility exists.
Forward contracts are not regulated by an organized exchange. Unless centrally
cleared, each party to the contract is subject to the default of the other party (credit
risk).

Example 1:

Entity A entered into a forward contract with Entity B on 1 January 2006 to receive
$10 million and pay £6.6 million on 1 January 2007.

Example 2:

On January 1, 2016, ABC Company expected to purchase 50,000 kilos of tobacco

from a supplier on January 31, 2017, at the prevailing market price on such date.

Recent market factors indicate that the market price of tobacco per kilo is within the
vicinity of P150. To protect itself from the variability of the market price of tobacco,
ABC Company entered into a forward contract with a speculator bank under the
following terms:

• If the market price is more than P150, the excess is paid by the bank to ABC
Company.
• If the market price is less than P150, the deficiency is paid by ABC Company
to the bank.
A futures contract is an exchange-traded legal contract to buy or sell a standard
quantity and quality of a commodity, financial instrument, or index at a specified
future date and price. Entities typically use futures contracts as hedging instruments
to protect themselves against price risk or interest rate risk. Futures contracts are
traded on a regulated exchange and result in less credit risk than forwarding
contracts.

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Example: On 30 September 2005, Entity A entered into a futures contract to buy 100
tons of wheat at a future price of €73 per ton in July 2006.
An option is a contract giving its owner the right, but not the obligation, to buy
(call) or sell (put) a specified commodity, foreign currency, or financial instrument
at a fixed price (exercise or strike price) during a specified period of time (American
option) or on a specified date (European option). The buyer pays a non-refundable
fee (the premium) to the seller (the writer) for this benefit. Entities use options as
hedging instruments to protect themselves against adverse changes in share and
commodity prices, interest rates, and foreign currency exchange rates, as well as for
speculative purposes.
Example:
An entity purchases a put option from an issuer for oil on 1 January 2006. The
option is for three months with a strike price of $22.50 on 100,000 barrels of oil.
The holder is not required to exercise the option and can let the option expire if it
does not require the supply of oil or if the price of oil falls below the strike price (as
it is cheaper to purchase the oil in the marketplace rather than exercise the option).
An interest-rate cap (floor) is an over-the-counter (OTC) instrument that protects
the holder from increases (decreases) in short-term interest rates by making a
payment based on a notional principal amount to the holder when an underlying
interest rate (the “index” or “reference” interest rate) exceeds (or falls below) a
specified strike rate (the “cap rate” or “floor rate”). Caps (or floors) are purchased
for a premium and typically have expirations between one and seven years.
Payments are made to the holder on a monthly, quarterly, or semi-annual basis,
with the period generally set equal to the maturity of the index interest rate. The
payments are essentially a series of interest rate options bundled together in one
instrument.
Example:
Assume a three-year, £200,000 notional principal amount interest rate cap with six-
month LIBOR as its index rate, with a strike price of 7.5%. If the six-month LIBOR
interest rate increases above 7.5%, the holder will receive payments for the
difference based on the £200,000 notional.
A collar is a combination of a cap and a floor. The premium due for the cap is
partially offset by the premium received for the floor (or vice versa), making the
collar an effective way to hedge interest rate risk at a low cost. In return for this
protection, the entity gives up the potential benefit of favorable rate movements
outside the band defined by the collar.
Example: A customer is borrowing from ACD Bank $200,000 at a six-month LIBOR
+2% interest rate of 7.75% (six-month LIBOR is currently 5.75%). The customer
wishes to cap LIBOR so that it does not exceed 6% (the strike price). The customer
buys a cap and pays the bank $1,500. If the six-month LIBOR interest rate increases
above 6%, the customer will receive payments for the difference based on the
$200,000 notional amount.
In order to reduce the cost of the cap, the borrower sells a floor to ACD bank with a
strike rate of 4%. The bank and the customer have created a "band" (the collar)
within which the customer will pay LIBOR + 2%. If the LIBOR drops below the floor,
the customer compensates for ACD bank. If LIBOR rises above the cap, ACD bank
compensates the customer.
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An interest rate swap is a contract between two parties to exchange interest

payments on a specified notional principal amount (referred to as the notional
amount) for a specified period in the future. Generally, an interest rate swap
involves the exchange of streams of variable and fixed-rate interest payments.
Interest rate swaps allow an entity to access funding in the financial markets that
are readily available to them but are able to convert (swap) it into the funding rate
required.
Example:
Company Y issues €100,000 debt which pays three-month LIBOR on a quarterly
basis. Company Y would like to "fix" its interest rate risk exposure relating to the
debt issuance. Company Y enters into an interest rate swap with Company Z. The
terms are that Company Y pays a fixed rate of 8% and receives a variable amount
based on three-month LIBOR on a quarterly basis; the fixed and variable amounts
are determined based on a €100,000 notional amount. Y and Z do not exchange the
notional amount, and Company Y pays or receives a net cash amount each quarter
based on the difference between 8% and three-month LIBOR.
The currency swap is an exchange of principal denominated in two different
currencies at the current (spot) rate under an agreement to repay the principal at a
specified future date at a specified rate.
Example:
Company ABC enters into a five-year fixed-for-fixed currency swap on the euro and
US dollar. Company ABC will receive euro currency at a rate of 5.68% on €100
million and pay in dollar currency at a rate of 6.53% on $130 million. There will be a
final exchange of principal on the maturity of the swap contract based on the
current $1.3:€1 spot exchange rate between the dollar and the euro.

Glossary
Fund: A source of money that is allocated for a specific purpose.
Sinking fund: A bond with a fund or account into which an issuer deposits money on a
regular basis to repay the bond when it matures.
Contingency fund: Fund set aside to cover possible unforeseen expenses.
Insurance fund: Form of collective investments offered life assurance policies.
Cash surrender value: The sum of money an insurance company pays to the
policyholder or annuity holder in the event his policy is voluntarily terminated before its
maturity, or the insured event occurs.
Derivatives: Security where the price is dependent upon or derived from one or more
underlying assets
Underlying asset: Financial instrument on which a derivative's price is based.

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 Future contracts: Buying instruments at a specified time in the future at a
predetermined price.
Forward contracts: Buying instruments at a specified price on a future date.
Swaps: Exchanging cash flows
Options: Gives the buyer the right and not the obligation to buy or sell the underlying
asset.
Warrants: Confers the right, but not the obligation, to buy or sell a security – normally an
equity – at a certain price before the expiration.

References and Supplementary Materials

Books and Journals
1. Cabrera, M. B., & Ocampo, R. R. (n.d.). Financial Accounting & Reporting - Standards &
Application (2014-2015 ed., Vol. 2). Manila, Philippines.
2. Robles, N. S., & Empleo, P. M. (2014). Intermediate Accounting (2014 ed., Vol. 1).
Manila, Philippines.
3. Valix, C. T., Peralta, J. F., & Valix, C. M. (2017). Financial Accounting (2017 ed., Vol.
2).Manila, Philippines.
4. IAS 39, Financial Instruments: Recognition and Measurement
Online Supplementary Reading Materials
1. Sinking Fund, Sinking Fund Assets, Sinking Fund Bonds, and Sinking Fund
Redemption Notice; http://www.sfu.ca/~poitras/417_sinking_fund.pdf; October 23,
2017
2. IFRS 9 Financial Instruments; http://www.ifrs.org/issued-standards/list-of-
standards/ifrs-9-financial-instruments/; October 20, 2017
3. Options, swaps, futures, MBSs, CDOs, and other derivatives;
https://www.khanacademy.org/economics-finance-domain/core-finance/derivative-
securities; October 20, 2017
Online Instructional Videos
1. Sinking Fund; http://www.investopedia.com/terms/s/sinkingfund.asp; October 23,
2017
2. Options, swaps, futures, MBSs, CDOs, and other derivatives;
https://www.khanacademy.org/economics-finance-domain/core-finance/derivative-
securities; October 20, 2017
3. Derivative;
http://www.investopedia.com/terms/d/derivative.asp?ad=dirN&qo=investopediaSit
eSearch&qsrc=0&o=40186; October 20, 2017