Again, [proprietary] accounting standards differ slightly in wording, but in principal the fair value of a liability [sic] is the price at which an entity [sic] could extinguish any future obligations, in an arm's length transaction.

The writer means the fair value of a SECURITY which is distinct from the "value of a liability," the total balance remaining or specified principal plus total interest owed. By "entity" I suppose the writer means seller, who may or may not be the only "creditor" entitled to the coupon rate since its issue. The PRICE of a marketable bond necessarily diminishes over time with balance of payments due.

That said, the sale date of the note WRT maturity date of the note is the more reliable gauge of PRICE, regardless of unobservable inputs ascribed by firm accountants to secured or unsecured assets' income or, even, amount of CDS proceeds applied to issuer's repayment schedule.

My question is --absent government intervention of securities circulating whereby treasury agents buy  paper in the secondary market in order to sell those securities at a discount to their issuers OR exercise equity warrants  -- at what point in the period is a bondtrader most likely to surrender a note for sale to its issuer below cost, i.e. price paid for the bond or balance of income to maturity?

I'm thinking, never, barring personal catastrophe, say, long-term unemployment or grandma's eviction.

It seems to me, this material is merely a explanation of one of a number of "mark-to-model" valuation methods --no matter how often the writer evokes the phrase "fair value"-- rather than fair ("mark-to-market") value reporting criteria proposed by FASB. (pdf).

Diversity is the key to economic and political evolution.