Chartered Financial Analyst (CFA) Practice Exam Level 2

Which type of cost reflects investments held to maturity?

1. Amortized Cost

2. Fair Value through Profit or Loss

3. Fair Value through Other Comprehensive Income

4. Historical Cost

The correct answer is: Amortized Cost

The type of cost that reflects investments held to maturity is amortized cost. This method is used for financial assets that are intended to be held until they mature, such as bonds. Under the amortized cost approach, the initial cost of the investment is adjusted for principal repayments and any amortization of premiums or discounts over the life of the asset. This means that the carrying amount of the asset reflects its value based on the cash flows expected over its life, making it a suitable approach for investments held to maturity. In contrast, fair value through profit or loss and fair value through other comprehensive income are methods that reflect changes in market value over time. Investments valued under these approaches are not limited to those held to maturity and can fluctuate significantly with market conditions, yielding values that may not accurately reflect the effective cost of the investment as it matures. Historical cost, while it reflects the original purchase price of an asset, does not provide a dynamic valuation that takes into account the passage of time or the expected cash flows from the asset. Therefore, it is not specifically designed for investments held to maturity. By utilizing amortized cost, investors gain a clear picture of the value of their held-to-maturity securities, focused solely on cash flows and the time value of