Investment Securities
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| Investments in debt securities are carried at amortized cost only when they qualify as 'held-to-maturity.'' To so qualify, the investor must have the positive intent and the ability to hold those securities until they mature. Early in the Stock Exchange, typical purchased on the New York Stock Exchange mortgage bonds issued by one of its major suppliers. These bonds are due in full in five years and bear interest at 8% per year. The issuer would make an unscheduled principal prepayment of $50. Since typical intends to maintain a continuing relationship with this supplier and to hold the bonds until they mature - and appears to have the financial strength to do so - this investment is classified as held-to-maturity. |
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Additional Comments:
However, this investment must also be reviewed to ensure that it is probable that all contractually specified amounts are fully collectible. If not fully collectible, this investment would be considered permanently impaired. If such permanent impairment were found to exist, it would be necessary to write this investment down to its fair value.
In this case, however, the issuer is in a strong financial condition. This is evidenced in two ways. First, the issuer made an unscheduled prepayment of principal. Second, the property values have increased significantly where this well-maintained plant that secures these bonds is located. As such, there is no reason to suspect that all contractual amounts will not be collected. Thus, there is no impairment, and no write down is necessary. |
Related Terms: | ||
Bond A debt obligation issued by a government (i.e., Treasury bond) or corporation (i.e., corporate bond) that ... Maturity The date on which a bond's principal is repaid to the investor and interest payments cease. ... Treasury Bond U.S. Treasury bonds, also known as long bonds, are issued in 30-year terms.The T-bond is ... | ||
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