When interest rates have increased and bonds are retired before maturity,market value is below book value generating an accounting loss.

Question

Quizplus · Accepted Answer

When interest rates increase, the market value of existing bonds typically decreases because new bonds are issued at the higher current interest rates, making the older, lower-yielding bonds less attractive. However, if bonds are retired (bought back) before maturity, the entity retiring the bonds may actually realize a gain if the market value (the price paid to retire the bonds) is below the book value (the value at which the bonds are recorded on the entity's balance sheet). This is because the entity is effectively eliminating its obligation for less than what it was accounted for, not generating an accounting loss.

When Interest Rates Have Increased and Bonds Are Retired Before