Module: | Primary Categories & SPPI Rules
Q4: Consider the following statements regarding the eligibility of instruments for Held to Maturity (HTM) classification:
Assertion (A) - Instruments with contractual loss absorbency features, such as Basel III Additional Tier 1 bonds, are ineligible for HTM classification.
Reason (R) - These instruments do not meet the 'Solely Payments of Principal and Interest' (SPPI) criteria.
Reason (R) - These instruments do not meet the 'Solely Payments of Principal and Interest' (SPPI) criteria.
✅ Correct Answer: A
Instruments with contractual loss absorbency features (like AT1 bonds) are explicitly excluded from HTM.
The reason is that these features violate the strict SPPI criteria required for amortised cost accounting, as the cash flows are not solely principal and interest but are subject to write-down triggers.
This is a recurring theme in Investment Classification MCQs.
The reason is that these features violate the strict SPPI criteria required for amortised cost accounting, as the cash flows are not solely principal and interest but are subject to write-down triggers.
This is a recurring theme in Investment Classification MCQs.