Bank accountants classify transactions into two categories:
the banking (or accrual) book;
the trading book.
The key accounting characteristic of the banking book is that loans, deposits and bonds (investment portfolio) are recorded at their historical cost (i.e. a loan of 1 million remains recorded at 1 million over the life of the loan). The key consequence for the profit and loss account is that the banking book generates a net interest margin (NIM) which is the difference between the interest received and the interest paid. Since the net interest margin is usually a major component of a bank’s P&L, the impact of interest rate risk on the NIM has to be analysed very carefully.
 Bonds are recorded ...