You are asked to evaluate a five-year, convertible debt offering being considered by management. This offering, effective January 1, 2013, is for $40 million. It would be issued at 2% below prevailing interest rates at the time of issuance and is due on December 31, 2017 (five years after issuance). The conversion feature of the debt would allow the debt holders to convert each $1,000 of debt into 10 shares of common stock. The issuance costs are expected to total $200,000, which will primarily comprise attorney and accounting fees. The reporting entity follows IFRS. Assume the prevailing interest rate for the non-convertible bonds is 6% at the beginning of the year. Amounts calculated should be rounded to the nearest thousand.

I need to know:

How much interest is to be recorded for the year 2014?

What is the amount of the ending liability to be recognized at the end of 2016?

Is this a hybrid financial instrument?