Unrealized losses on bonds

When rates rise, the price of bonds already held falls, and the more so the longer their remaining term. If the security is carried at amortized cost, that decline enters neither profit nor equity: it is an unrealized loss, which disappears on its own if the bond is held until it is redeemed at par. The treatment is coherent for a holder whose liabilities are stable and long, and that is the argument life insurers and banks make. It becomes misleading as soon as the liabilities can leave before maturity, because the bonds must then be sold and the loss becomes final. Regulation responds with recognition mechanisms, in France the liquidity risk reserve, and prudent analysis always sets the stock of unrealized losses against the likelihood of having to sell.