When the market rate of interest falls after issuance, a company selecting the fair value option for reporting a liability with a fixed coupon rate will report:
C is correct. A company selecting the fair value option for a liability with a fixed coupon rate will report a loss when market interest rates decrease.
Why is the reported liability of bond will decrease when then interest rate decrease? Could anyone explain the logic? Thank you so much.
The liability doesn’t decrease; it increases.
That’s why you have a loss: Debit Loss on Bonds Payable, Credit Bonds Payable.
I think the problem is that we are talking about a liability, not an asset. in the cas of an asset, it would gain from a decrease in market rate; however I guess as we are talking about tue issuer of the bond, a liability on the BS, it is the other way aroung
So when the interest rate fall for fixed rate coupon Bond
The liability of Bond Payable will decrease, and the Market Value of Bond (Asset) will increase ?
Sir, but would issuing bond be reported an asset to the issuer ? In my thinking, I can only think of reporting liabilities. hope it clear my understanding. Thank you.
No.
Bonds are stupid. They don’t know whether you issued them or you invested in them, whether you sold them or bought them.
When interest rates fall, the value of a fixed-coupon bond will increase. If you issued the bond and report it at fair value, that means that your liability will increase, and you will report a loss. If you bought the bond and report it at fair value, that means that your asset will increase and you will report a gain.
There are two parties involved: the buyer of the bond records it as an investment (asset); while the issuer records it as a debt (liability). Hence, if the buyer gains from the increased in value, the issuer must lose from this situation.