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.

Step back for a moment.

Bonus pools are skimmed from revenue, are they not?

Let's be clear that the alleged defects or refinement of rules requiring estimation of market prices pertain to quality of information needed to approve a firm's credit application, not its actual operating performance. And perhaps what offends you most of all is, the representation of operating performance suggested by imaginary transactions --events which have not occurred-- rather than the realized gain (retired debt) in unobligated income or loss (asset "write down") attributed to repayments of historical cost, "buys" at market rate, or defaults which have occurred.

Mr Young [believed] that most [financial statement] users do not expect revaluation of the entity's securities (which are part of an entity's overall capital structure) to be a component of operating performance. In his view, the changes in the entity's overall capital structure (both debt capital and equity capital), particularly from the effect of changes in the entity's own creditworthiness, should not be reflected in business performance. Recognizing changes in an entity's own creditworthiness in earnings could mislead users and potentially represent or conceal operating performance issues. At a minimum, eligibility criteria should be required when the fair value option is elected for the debt portion of an entity's capital structure. [2007: 25]

820 would correct valuation errors allowed by 159 that permit firm accountants to discriminate cash equivalence and selection of certain classes of assets and assumptions about future operating conditions and income.

820 would force firm accountants to disclose data inputs to an estimated the value of securities, promissory notes and outstanding coupons as if the market price less historical cost of each instrument represented cash equivalent value in sum of the going concern if liquidated a/k/a its book value. Well, that's debatable. But there you have the solution to the problem of financing firms ever on the verge of insolvency.

At least 820 attempts to harmonize, or standardize, mark-to-model methodologies. That is a good thing.

Let's not lose sight of the so-called paralysis that seized the capital market because prospective traders lost "confidence" in the "liquidity" of each other's financial instruments for sale or pledged for collateral. The quality of that information is as important to prospective creditors as realized profit (loss) over a reporting period.

How else do you propose to evaluate the cash equivalence of financial instruments which comprise the manufacture and inventory of financial services firms?


Diversity is the key to economic and political evolution.

I think it's not so much that these are accounting abominations but that accounting is itself an abomination because it was created in the days of fixed income streams and constant interest rates and is wholly unprepared to deal with fluctuating markets in a sensible way.