Final answer:
Credit the fair value account when the fair value of a trading security is greater than the original cost, indicating a gain. Conversely, a decrease in fair value compared to the original cost is recorded with a debit, indicating a loss.
Step-by-step explanation:
When managing trading securities, financial accounting requires adjustments to reflect their fair value changes at each reporting period. To correctly record these adjustments:
- You credit your fair value account when the fair value of the security is greater than the original cost, creating a gain.
- Conversely, you do not credit your fair value account when the fair value is less than the original cost. Instead, you would debit the fair value account, recognizing a loss.
In financial markets, the present discounted value plays a crucial role. This is the value you are willing to pay today for a stream of future benefits. Securities' valuation and the determination of present discounted value are influenced by factors such as anticipated capital gains, dividends, and the prevailing interest rate. Bonds, for instance, will vary in price based on interest rate fluctuations. A falling interest rate implies the bond's locked-in rate is advantageous, increasing its value, while a rising interest rate means the bond is now at a disadvantage, decreasing its value.