Change in market rates

CFA Level I FRA
#1

Dear friends I need to know how will impact the carring value of a bond if market rates change and i amortized the bond at effective interest rate ? Will change my balance sheet if market rates change ? Because I dont understand that in my exercise said that FOR ANALYTICAL PURPOSE WILL CHANGE MY BALANCE SHEET RATIOS but in other exercise said that the change in market rates will not affect amotized cost.

Can someone explain me better this

Thank you

#2

Is this a bond you’ve issued or a bond you’ve purchased as an investment?

#3

Hi,

as you mentioned the effective interest rate method I suppose that you refer to the carrying value of an issued bond.

2 things to consider:

1. Accounting treatment of an isued bond:

a. Using the effective interest method the bond will not flucutate with changing market rates as the annual bond amortization is calculated on the yield to maturity at issuance which is contant over the lifetime of the bond. (annual amortization premium bond: coupon payments minus YTM at issuance). This is the most common way of accounting for a bond.

b. Under IFRS there exists however the irrevocable option to account for the bond at fair market value. That means that every year a loss or a gain is recorded on the income statement according to fluctuating market yields. This is the only case where changing market rates would have an impact on the carrying value of the bond. This method is however not used very much.

2. Considering bond values for valuation purposes (e.g. WACC calculations):

When trating with valuation problems (e.g. WACC, DCF, EV to Equity bidges, certain ratios,…) market values should be used for debt an equity. So you need to calculate the market value of the bond at a certain point in time. As you pointed out this market value has an inverse relation with the current market rates. However, this has nothing to do with your balance sheet or accounting. You only use this market value to perform certain calculations.

Hope this is of help.

Best, Oscar

P.S.: Where are you from? BsAs.?

#4

Thank you very much Oscar and s2000magician.Oscar im from Buenos Aires

S2000magician is a bond i issue

Thank you

#5

My pleasure, though I didn’t do much.