Securities other than shares (AF.3)

6.52 When bonds are issued at a premium or discount, including deep discounted and zero coupon bonds, the difference between its issue price and its face or redemption value when it matures measures interest that the issuer is obliged to pay over the life of the bond. Such interest is recorded as property income payable by the issuer of the bond and receivable by the holder of the bond in addition to any coupon interest actually paid by the issuer at specified intervals over the life of the bond (see paragraph 4.46.). The interest accruing is recorded in the financial account as being simultaneously reinvested in the bond by the holder of the bond (see paragraph 5.17.). It is, therefore, recorded in the financial account as the acquisition of an asset which is added to the existing asset . Thus the gradual increase in the market value of a bond that is attributable to the accumulation of accrued, reinvested interest reflects a growth in the principal outstanding - that is, in the size of the asset. It is essentially a quantum or volume increase and not a price increase. It does not generate any holding gain for the holder of the bond or holding loss for the issuer of the bond. The situation is analogous to that of a good, such as wine, that matures while it is being stored. Any increase in the price of the wine that is attributable to an improvement in its quality reflects an increase in volume and not price. Bonds change qualitatively over time as they approach maturity and it is essential to recognise that increases in their values due to the accumulation of accrued interest are not price changes and do not generate holding gains.

6.53 The prices of fixed-interest bonds also change, however, when the market rates of interest change, the prices varying inversely with the interest rate movements. The impact of a given interest rate change on the price of an individual bond is less, the closer the bond is to maturity. Changes in bond prices that are attributable to changes in market rates of interest constitute price and not quantum changes. They therefore generate nominal holding gains or losses for both the issuers and the holders of the bonds. An increase in interest rates generates a nominal holding gain for the issuer of the bond and an equal nominal holding loss for the holder of the bond, and vice versa in the case of fall in interest rates.

Nominal holding gains or losses may accrue on bills in the same way as for bonds. However, as bills are short-term securities with much shorter times to maturity, the holding gains generated by interest rate changes are generally much smaller than on bonds with the same face values.

6.54 The conversion of bonds into shares is recorded as two financial transactions (see paragraph 5.62. l). It will usually take place at a price below the market price of the shares and the resulting holding gains are to be recorded as a price change under the revaluation account.

6.55 The value of financial derivatives (AF. 34) may change as a result of changes in the value of the underlying instrument, changes in the volatility of the price of the underlying instrument, or approaching the date of execution or maturity. All such changes in value should be regarded as price changes and recorded under K.11.