The accounting for investments held to maturity under US gap or amortized cost under IFRS is more complicated than for other financial instruments.

This is because when loans or bonds are initially issued, the full amount of the loan or bond may not be received by the borrower.

For loans, this is typically due to fees being deducted from the funds transferred to the borrower or for a bond, the coupon rate, not exactly matching investors' required return.

In this example, we're looking at a 200 million par value bond with a 5% coupon rate and a purchase price of 192 million on its issue date.

This means that there is a discount of 8 million or 4% below the par value.

As such, even though the issuer has issued a 200 million par value bond, they'll only receive 192 million in cash.

On the issue date.

The amortized cost approach for accounting for such a bond is effectively to treat the discount as additional interest.

From a pure cashflow perspective, the bond purchaser pays out 192 million, initially, then receives 10 million in interest each year, then receives 200 million at maturity.

Given these cash flows, the effective rate of return or IRR can be solved for using the IRR or rate function in Excel, which will give us the effective interest rate of 6.2%.

This is the rate which will then be used to calculate the interest income that the bank can recognize as revenue within their income statement over the next four years.

Let's have a look at how the accounting for this bond will work.

When the bond is issued, assuming the bank buys the entire bond issued, the bank will pay out 192 million and this will be offset by an increase in the bond asset of the same amount.

If we look at this in the debt schedule, interest income is added to the outstanding balance.

Since the bond issuer now owes the bank interest as well as the money that was originally received from the bond being issued.

This is calculated by multiplying the effective interest rate of 6.2% by the beginning balance for the year of 192 to give us the accrued interest expense of 11.8 million.

This can be recognized by the bank, the owner of this bond as interest income.

However, at the end of year one, the bond issuer makes a coupon payment of 10 million representing the coupon rate of 5% times the bond's par value of 200 million, meaning that this 10 million is no longer owed to the bond holder, the bank in this instance.

So it is deducted from the outstanding debt balance to give 193.8 at the end of the year.

If this process is repeated for each of the four years of the bond's life, with the final principle repayment of 200 million being made in the end of the fourth year, then there will be no balance left to be repaid once the bond has been fully paid off.

So how does this get reflected in the bank, the bond owners financial statements? Well, for year one, the bank's cash balance will increase by 10 since they have received the coupon payment and retained earnings will increase by 11.8.

Since the 11.8 accrued interest income based on the effective interest rate is allowed to be shown as interest income.

In the income statement, the balance sheet remains in balance as the bond asset for the bank increases by the difference between the cash and accrued interest numbers.

In other words, increasing by 1.8 up to the 193.8 ending debt balance at the end of year one.

The total amount of interest that will be recorded in the bank's income statement over the four years of this bond's life will be 48 million.

That being the sum of the interest income for each of the four years, which is made up alternatively as the 8 million initial discount, plus four years of 10 million coupon payments.