Financial Accounting: In an Economic Context

INVESTING IN BONDS

Many companies include bonds in their investment portfolios. Compared to equity securities, bonds are relatively low risk, providing periodic interest income in addition to potential capital gains (and losses) as market values increase (decrease). To illustrate how large bond investments can be, as of December 31, 2008, General Electric Capital Service (GECS) included on its balance sheet bonds issued by U.S. companies valued at over $23 billion.

The method used to account for bond investments depends on management's intention, leading to three possible classifications: (1) held-to-maturity securities, (2) trading securities, and (3) available-for-sale securities. Held-to-maturity securities are, as the name suggests, bond investments that management does not intend to sell, intending instead to hold them until the maturity date, when the face value of the bond (usually $1,000) will be received. Trading debt securities are bought and held principally for the purpose of selling them in the near future with the objective of generating a profit on short-term price changes. Available-for-sale debt securities are neither intended to be sold in the near future nor intended to be held until maturity. The methods used to account for bond investments classified as trading or available-for-sale are very similar to those described in Chapter 8, which covered investments in equity securities. Both are carried on the balance sheet at market values; holding gains and losses ...