Debt securities transfer to profit or losses are proportioned to cost of bonuses in debt security management. Bonus payments will reduce significantly in this scenario since there is a decline in fair value of the assets in the portfolio. The variability relating to bonus declarations, also including shareholder returns, is usually equivalent to that of the asset return. When practicing companies tend to smooth declaration of bonuses (Vanderhoof & Altman, 2000). A company with huge and varied estates can chose the degree of smoothing bonus declarations. It depends on various considerations such as marketing among others- not only financial.
In certain situations bonus declarations may be fixed in advance. A discount rate could be justified if Hartman maintains a bonus smoothing procedure where a change in portfolio value will result in a less than proportionate change in bonuses. On the other hand, if the company has limited assets and is unable to expected bonus payments, then the bonus payments would be calculated at a rate equal to the expected return on the assets holding the payments. Generally, a reduction in portfolio fair value guarantees a reduction in bonuses. The difference is evident if the company has a smoothing policy on bonuses or otherwise.
In determining a criteria for classifying the securities held- to- maturity or available for sale will be determined by the ability of borrowers to repay. Those debts with higher risks of default will have higher interest rates on borrowed capital (Investopedia, 2003). Since the company earns through interests, higher interest rates will earn the company more income and thus more bonus for Hartman. Determining which securities to charge higher interest rates and the ones to brand as available for sale is an ethical challenge.
Duru, A., Mansi, S., & Reeb, D. (2005). Earnings-based bonus plans and the agency costs of debt.Journal Of Accounting And Public Policy, 24(5), 431-447. doi:10.1016/j.jaccpubpol.2005.06.003
Investopedia. (2003). Debt Security Definition | Investopedia. Retrieved 26 July 2015, from http://www.investopedia.com/terms/d/debtsecurity.asp
Vanderhoof, I., & Altman, E. (2000). The fair value of insurance business. Boston: Kluwer Academic Publishers.