Oh, the magic of discounting...
See this thread from a year ago...
Migeru:
Economics and Politics - Paul Krugman Blog - NYTimes.comSo Citigroup is profitable because investors think it's failing, while Morgan Stanley is losing money because investors think it will survive. I am not making this up.
So Citigroup is profitable because investors think it's failing, while Morgan Stanley is losing money because investors think it will survive. I am not making this up.
Holding To AccountOwn Credit CVANow what about Citi? It has the same pricing model as GS, which calculates a FV of $1m. So surely C recognises a financial liability of $1m? No. Again, accounting standards differ slightly in wording, but in principal the fair value of a liability is the price at which an entity could extinguish any future obligations, in an arm's length transaction. I.e. "What price would a counterparty be willing to cancel/settle the trade at now. Well, we have seen above that GS, and probably the rest of the market, would accept $700k to cancel the deal. So, Citi gets to write the liability down to $700k. In accounting terms:DR Financial Liabilities $300kCR Principal Transactions $300kYes, you have read it correctly - Citi has made a profit of $300k as a result of becoming less creditworthy!!! In accounting/industry spreak, Citi has made an Own Credit CVA of $300k.Read the whole post.
Own Credit CVANow what about Citi? It has the same pricing model as GS, which calculates a FV of $1m. So surely C recognises a financial liability of $1m? No. Again, accounting standards differ slightly in wording, but in principal the fair value of a liability is the price at which an entity could extinguish any future obligations, in an arm's length transaction. I.e. "What price would a counterparty be willing to cancel/settle the trade at now. Well, we have seen above that GS, and probably the rest of the market, would accept $700k to cancel the deal. So, Citi gets to write the liability down to $700k. In accounting terms:DR Financial Liabilities $300kCR Principal Transactions $300kYes, you have read it correctly - Citi has made a profit of $300k as a result of becoming less creditworthy!!! In accounting/industry spreak, Citi has made an Own Credit CVA of $300k.
Some banks have actually been buying up their own bonds (for amounts less than their full face value), so it's not completely cut off from reality.
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.
As everyone knows, Topic 820, now in revision, is the new name of FAS 157 which defined asset classes for Basel II "unification" purposes
Possibly related hooha of "complex structured financial product" EXPORTS: Level 2 assets are the new Level 3 NYSSCPA to FASB: Weak! Dems to NeuLabradores: Automate Suckas!, or the Blueprint for Working Families and Women Returns Diversity is the key to economic and political evolution.
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?
Market solution? or CIVIL ACTION? Market solution? or CIVIL ACTION? Market solution? or CIVIL ACTION?
bacon, bacon, bacon, I want bacon.
What to do, what to do... Diversity is the key to economic and political evolution.
cash value added (CVA) is not an accounting term
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.
