Dear all,

Suppose there is a 5 year 6%bond bought at discount @ 46.7 (face value of bond is 100). YTM @ issuance is 7%.

If the bond is classified as Held to Maturity (“HTM”), then the amortized cost for the tenor of the bond will be:-

Year 0: 46.7

Year 1: 55.97

Year 2: 65.88

Year 3: 76.50

Year 4: 87.85

Year 5: 100

**Fair values** (hypothetically) of the bond are as followed:

Year 0: 46.7

Year 1: 60

Year 2: 70

Year 3: 80

If the bond is reported as Available-For-Sales (“AFS”),

In Year 1, there will be an unrealized gain of 60-55.97=4.03 which go to OCI under Shareholders Equity. The bond will be reported @ fair value of 60 on the balance sheet. _ **Am I right for this portion?** _

In Year 2, there will be an additional unrealized gain of 70- 60=10 which go to OCI. The unrealized gain is now 14.03 in the OCI under Shareholders Equity. The bond is reported @ fair value of 70 on the balance sheet. _ **Am I right for this portion?** _

One day after end of Year 2 (i.e. 1st Jan of Year 3), the bond is sold for 110. The unrealized gain of 14.03 will be taken out of the OCI under Shareholders Equity. The realized gain recongised in the P&L will consist of:-

- unrealized gain of 14.03 now realized and
- realized gain of 110- 70 = 40.

_ **Am I right?** _

Thank you.