Investments

Question 1

Bonds: Held-to-Maturity (no FV option selected)

Answer 1

-changes in FV do not show up on net income (ie. no unrealized G(L))
-interest is recog’d using effective rate and the difference over face value is added to principal, then that new principal is used the next year.
Ex. $10K face val bond w/ 8% int, sold at $9,232 with effective rate of 10%. (Ignore any FV info unless FV option elected).
Yr 1 income: 9,232x10%=923 is effective int
10,000x8%=800 is cash pd int
=123 is added to princ
+9,232 beg princ
=9,355 new princ
Yr 2 income:9,355x10%=936 effective int
10,000x8%=800 is cash pd int
=136 is added to princ

Question 2

Bonds: Held-to-Maturity (Fair Value option selected)

Answer 2

Unlike normal bonds, when Fair Value option elected, then they are treated just like trading securities, and the changes is FV are recog’d on I/S as unrealized G(L).