The Term Structure of Interest Rates and Accounting for Debt.

The article discusses implication of the term structure of interest rates on accounting with special attention to the accounting for liabilities. One must consider the term structure of interest rates in any situation where there are future benefits or costs and an attempt is being made to evaluate the economic impact of those benefits or costs. People frequently assume that the same time value of money applies to all time periods, but this may not be appropriate. It is generally assumed that if a .05 bond is sold to yield .05 then the interest of each period will be $50 on a $1,000 bond. Once people recognize that there is a term structure of interest rates it is no longer obvious that the interest expense of each period is equal to $50. In fact there is reason to think that people will have different interest charges in each period. If the term structure of interest rates has application in the recording of debt it obviously has application in recording the corresponding assets in the reports of the company holding the debt. In addition to the implications for the recording of transactions there are also implications for decision making. This article has not attempted to incorporate risk attitudes or changing probabilities of default. One can assume that rates of interest being used to accomplish the discounting are default free rates not reflecting fears of inability to collect.