Rising Interest Rates and the Carrying Value of Long-Term Bonds

Effects of Rising Interest Rates on the Carrying Value of Long-Term Bonds

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Question

Under GAAP, when interest rates rise, the carrying value of a long-term bond ________.

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A. B. C. D.

A

Long-term debt is recorded at acquisition cost and historical cost accounting does not allow revaluation. Hence, even though the market value of the debt changes due to a change in interest rates, the book value of the debt changes only at the regular amortization schedule, independent of the market changes.

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