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As discussed in Chapter 4, governments must mark-to-market their investments (including held-to-maturity securities). Suppose that...

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Accounting

As discussed in Chapter 4, governments must mark-to-market their investments (including held-to-maturity securities). Suppose that a city has in its portfolio debt securities that it intends to hold to maturity. Interest rates increase. Therefore, the market value of the securities decreases, and accordingly the city must recognize an investment loss. As interest rates increase, the market value of its outstanding bonds also decreases. Irrespective of current accounting standards, do you think that the city should recognize a gain from the decrease in value of its outstanding bonds? Explain.

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