Final answer:
The change in market interest rates does not directly impact the consolidated financial statements at the date of the parent company's acquisition of a subsidiary. In the financial markets, government borrowing can lead to increased interest rates which can lower the market value of existing debt.
Step-by-step explanation:
The change in market interest rates does not directly affect the consolidated financial statements at the date of acquisition if the parent company has acquired all the stock of a subsidiary. When a parent company acquires a subsidiary, the long-term debt of the subsidiary remains at its book value, unless it is not issued at par or there is an impairment. However, in the financial market models, an increase in government borrowing is shown to raise interest rates. This relationship is depicted in various figures demonstrating how a shift in the demand curve for financial capital to the right results in an increase in the equilibrium interest rate, exemplified by the change from 5% to 6%.
When applying this concept to an individual company's bonds, the market value of existing bonds typically will decrease if market interest rates increase after the bonds were issued. This is because the fixed interest payments of existing bonds become less attractive compared to new bonds that could potentially be issued at the higher current market rates.
Therefore, if the subsidiary's debt were traded on the market and the market interest rate decreases from 5% to 3%, the value of the subsidiary's debt would increase on the market. However, within the consolidated statements, since the acquisition involves 100% ownership, the actual book value of the subsidiary's debt remains unchanged unless management decides to revalue it or if there is an impairment.