Carson

Also, sticking with Held for Trading, if the carrying value resets to fair value, which it must, how is the effective interest rate method and the amortization applied going forward?
Sticking with the CFA example. At the end of year one interest is ￡13,500 (4.5% of ￡300k initially paid) - the additional ￡3k received from the coupon amortizes the carrying value to ￡297k. Income (in addition to interest) comes from the capital gain as the bond at the end of the year has a market value of ￡350k, which is ￡53 higher than the carrying value.
So far so good. What happens now? Under Held to Maturity the effective rate (4.5%) would be applied in the following year to the outstanding carrying value, and excess coupon would be used to further amortize that carrying value going forward. However, because the value of the bond has been refreshed the situation is quite different. The carrying value is not ￡297k, it is ￡350k (because we are dealing with a Trading asset updated to fair value). So, are we supposed to apply 4.5% to ￡350k to work out the interest? This clearly won’t work - first, because we’re not approaching a value (so we’re not actually amortizing); and second, because the effective market rate has probably changed along with the bond value, so 4.5% is historical and irrelevant now. Perhaps we’re supposed to continue amortizing an underlying carrying value, and book income from the annual amortizations plus the gain in fair value? This seems messy, and the carrying value ceases to have a consistent meaning.
I really don’t see how this works…