Question: As discussed in Chapter4 governments must mark to market their investments including
As discussed in Chapter4, governments must mark-to-market their investments (including held-to-maturity debt securities). Suppose that a city has in its portfolio debt securities that it intends to hold to maturity. Interest rates increase. Therefore the market value of the securities decreases, and accordingly the city must recognize an investment loss. Correspondingly, the city also has issued debt. As interest rates increase, the market value of its outstanding bonds also decreases. Irrespective of current accounting standards, do you think that the city should recognize a gain from the decrease in value of its outstanding bonds? Explain.
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