Document ID: chunk:federal_register_of_legislation:F2023C00399:body:0:p102
Version: federal_register_of_legislation:F2023C00399
Segment Type: other
Provision Reference: 
Character Range: 284488–292333

in all respects except the tenor of the interest rate matches the interest period to determine if the cash flows are solely payments of principal and interest on the principal amount outstanding. (But see paragraph B4.1.9E for guidance on regulated interest rates.)

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              For example, in assessing a bond with a five-year term that pays a variable rate that is reset every six months but always reflects a five-year maturity, an entity considers the contractual cash flows on an instrument that resets every six months to a six-month interest rate but is otherwise identical.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              The same analysis would apply if the borrower is able to choose between the lender's various published interest rates (eg the borrower can choose between the lender's published one-month variable interest rate and the lender's published three-month variable interest rate).

Instrument C                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  The contractual cash flows of both:

Instrument C is a bond with a stated maturity date and pays a variable market interest rate. That variable interest rate is capped.                                                                                                                                                                                                                                                                                                                                                                                                                              (a) an instrument that has a fixed interest rate and
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 (b) an instrument that has a variable interest rate
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              are payments of principal and interest on the principal amount outstanding as long as the interest reflects consideration for the time value of money, for the credit risk associated with the instrument during the term of the instrument and for other basic lending risks and costs, as well as a profit margin. (See paragraph B4.1.7A)

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Consequently, an instrument that is a combination of (a) and (b) (eg a bond with an interest rate cap) can have cash flows that are solely payments of principal and interest on the principal amount outstanding. Such a contractual term may reduce cash flow variability by setting a limit on a variable interest rate (eg an interest rate cap or floor) or increase the cash flow variability because a fixed rate becomes variable.

Instrument D                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  The fact that a full recourse loan is collateralised does not in itself affect the analysis of whether the contractual cash flows are solely payments of principal and interest on the principal amount outstanding.

Instrument D is a full recourse loan and is secured by collateral.
Instrument E                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  The holder would analyse the contractual terms of the financial instrument to determine whether they give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding and thus are consistent with a basic lending arrangement.

Instrument E is issued by a regulated bank and has a stated maturity date. The instrument pays a fixed interest rate and all contractual cash flows are non-discretionary.                                                                                                                                                                                                                                                                                                                                                                                    That analysis would not consider the payments that arise only as a result of the national resolving authority's power