What Is the Difference Between Amortized Cost & Market Value of Securities?

Accounting methods, such as amortization and market valuations, are open for interpretation.

Financial analysis makes investment valuations debatable. Amortized cost and market values describe methods used by businesses to account for investable assets. Differentiate between these concepts prior to making decisions.

Identification

Amortization refers to interest accrual. For example, zero-coupon bonds are sold at discounts to face value, prior to face values being paid at maturity. One zero-coupon bond may be purchased at $750 for rights to receive $1,000 after one year. Using simple interest, the bond presents amortized value of $875 halfway toward maturity. Of course, fixed income securities may be traded at any time. Market value describes what investors are willing to pay for the investment.

Features

Market values for fixed investments decline when interest rates increase. Investors receive higher interest payments upon new bonds and assign lower values to older bonds. Amortized costs report higher values for securities at these times.

Considerations

The Federal Accounting Standards Advisory Board (FASAB) sets Generally Accepted Accounting Principles (GAAP) for reporting asset valuations.

Misconceptions

Alternating between amortized and market value accounting is legal. The SEC, however, requires businesses to disclose viable reasons for using each method.

Risks

Amortized cost often varies from market value. Businesses may incur large losses if forced to sell securities prior to maturity. Accrued interest may never materialize due to borrower bankruptcy.

References

• FASAB: Generally Accepted Accounting Principles
• Investopedia: Amortization
• Investopedia: Accrued Interest

Resources

• FASAB: Facts About FASAB