The Balance Sheet 195
interest and the time to maturity. Examples of bills are
treasury bills, negotiable certifi cates of deposit, bank-
ers’ acceptances, promissory notes, and commercial
paper.
7.145 A banker’s acceptance is created when a
fi nancial corporation endorses, in return for a fee, a
draft or bill of exchange and the unconditional prom-
ise to pay a specifi c amount at a specifi ed date. Inter-
national trade is oft en fi nanced in this way. A banker’s
acceptance is classifi ed under the category of debt
securities. A banker’s acceptance represents an un-
conditional claim on the part of the holder and an
unconditional liability on the part of the accepting
fi nancial corporation; in turn, the fi nancial corpora-
tion acquires an asset because it has a claim on its cus-
tomer. A banker’s acceptance is treated as a fi nancial
asset from the time of acceptance, even though funds
may not be exchanged until a later stage.^37
7.146 Bonds and debentures are securities that
give the holders the unconditional right to fi xed pay-
ments or contractually determined variable payments
on a specifi ed date or dates. Th e earning of interest is
not dependent on earnings of the debtors. Bonds and
debentures could have various characteristics and uses.
For example, bonds may be issued to recognize a lia-
bility for government employee pensions (oft en called
recognition bonds). Bonds can be issued at a deep dis-
count or with no coupons (zero-coupon bonds).
7.147 Zero-coupon bonds are long-term securi-
ties that do not involve periodic payments during
the life of the bond. Similar to short-term securities,
zero-coupon bonds are sold at a discount, and a single
payment, that includes accrued interest, is made at
maturity.^38 Deep-discount bonds are long-term secu-
rities that require periodic coupon payments during
the life of the instrument, but the amount is substan-
tially below the market rate of interest at issuance.
7.148 Instruments with embedded derivatives^39
are not classifi ed as fi nancial derivatives. If a primary
instrument, such as a security or loan, contains an em-
(^37) Appendix 1 of the EDS Guide provides a glossary of fi nancial
instruments, including banker’s acceptances.
(^38) For a discussion of the accrual recording of interest on zero-
coupon and deep-discounted bonds, see paragraphs 6.71–6.72
and the annex to Chapter 2 of the PSDS Guide.
(^39) An embedded derivative arises when a derivative feature is
inserted in a standard fi nancial instrument and is inseparable
from the instrument.
bedded derivative, the instrument is valued and clas-
sifi ed according to its primary characteristics—even
though the value of that security or loan may well
diff er from the values of comparable securities and
loans because of the embedded derivative. Examples
are corporate bonds that are convertible into shares of
the same corporation at the option of the bondholder
and securities with options for repayment of principal
in currencies that diff er from those in which the secu-
rities were issued. If the conversion option is traded
separately, then the option is treated as a separate in-
strument, classifi ed as a fi nancial derivative, and it is
not debt.
7.149 Loans (see paragraph 7.157) that have be-
come negotiable from one holder to another are to
be reclassifi ed (through other changes in the volume
of assets) from loans to debt securities under certain
circumstances. For such reclassifi cation, there needs
to be evidence of secondary market trading, including
the existence of market makers, and frequent quota-
tions of the instrument, such as provided by bid-off er
spreads.^40
7.150 Nonparticipating preferred stocks or shares
are those that pay a fi xed income but do not provide for
participation in the distribution of the residual value
of an incorporated enterprise on dissolution. Th ese
shares are classifi ed as debt securities. Bonds that are
convertible into equity should also be classifi ed as debt
securities prior to the time that they are converted.
7.151 Asset-backed securities and collateralized
debt obligations are arrangements under which pay-
ments of interest and principal are backed by payments
on specifi ed assets or income streams. Th is process
is also described as securitization (for more details,
see paragraph A3.59–A3.66). Asset-backed securities
are backed by various types of fi nancial assets—for
example, mortgages and credit card loans. A general
government unit may issue debt securities backed by
specifi c streams of earmarked revenue. Th is is not an
asset-backed security, as in macroeconomic statistical
systems, the ability to raise taxes or other government
revenue is not recognized as a government asset that
could be used for securitization. Nevertheless, the
(^40) An example is a syndicated loan, which is provided by a group
of lenders and is structured, arranged, and administered by one or
several commercial or investment banks. If parts of a syndicated
loan become traded in secondary markets, the loan may meet the
criteria to be reclassifi ed as a security.