CFA Practice Question

CFA Practice Question

Under GAAP, when interest rates rise, the carrying value of a long-term bond ______.
A. remains unchanged
B. decreases
C. depends on the characteristics of the bond
Explanation: Long-term debt is recorded at acquisition cost and historical cost accounting does not allow revaluation. Hence, even though the market value of the debt changes due to a change in interest rates, the book value of the debt changes only at the regular amortization schedule, independent of the market changes.

User Contributed Comments 4

User Comment
amitsinha Does Long term bond indiactes it will be held for maturity?
pepper what if it is a floating rate note? kept as its face value?
GBolt93 if it's a floating rate then coupon and yield will be the same, and it won't sell at a discount or premium. I.e. 100 par 5% coupon 5% yield is worth the same as 100 par 10% coupon 10% yield. Both sell at par.
thebkr7 Yes, I believe that it does mean held to maturity, not 100% sure but it makes sense
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