When market rates of interest rise after a fixed-rate security is purchased, the value of the now-below-market

When market rates of interest rise after a fixed-rate security is purchased, the value of the now-below-market, fixed-interest payments declines, so the market value of the investment falls. On the other hand, if market rates of interest fall after a fixed-rate security is purchased, the fixed-interest payments become relatively attractive, and the market value of the investment rises. Assuming these price changes are not viewed as giving rise to an other-than-temporary impairment, how are they reflected in the investment account for a security classified as held-to-maturity?

Expert Solution

Accounting for Investments

There are various approaches which a company may follow to account for its investments in equity and debt securities of other companies. Generally, companies recognize their investments at fair value but there are other alternatives too which ignore fair market value like held to maturity. It is essential to classify these investments into categories like trading securities, held to maturity or available to sale to record these in the appropriate accounts.

Any increase or decrease of market value of any security between the time it was acquired to the time it matures to its maturity value is generally ignored for the securities which are classified as held to maturity. These changes in market value are not important if the there is no intention of the management to sale such investment before its maturity that is the management has positive intention to hold the investment in securities till maturity.

Accounting for Investments

There are various approaches which a company may follow to account for its investments in equity and debt securities of other companies.

Junaid answered 2 years ago

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