30 SECOND GUIDE: Fair value of own debt

By DAILY MAIL REPORTER

Updated: 04:01 EST, 1 March 2013

The Daily Mail city team explains how companies can actually benefit from their debt.

Credit card bills mounting up?

Not quite. This is described by experts as an accounting anomaly. It is the theoretical cost to a company of buying back its own debt.

In the red: If a company can show it can repay its debts in full, the markets will respond accordingly

Why?

Strict accounting rules mean companies have to ‘mark their debt to market’, meaning they have to state what it would cost to buy the debt at any given time.

Why do I need to know?

Because it is making a huge impact on the headline profits of Britain’s biggest banks. Yesterday, Royal Bank of Scotland took a £4.6bn hit on its own debt. This, in addition to a rather large bill for mis-selling and rigging interest rates, forced it to a £5.2bn loss.

What does RBS say?

It claims the £4.6bn charge on its debt is a feather in its cap! Boss Stephen Hester said the huge charge means its credit worthiness has improved more than any other bank.

Pull the other one.

City analysts say he is right. A bigger charge reflects the fact that the markets take a more positive view of that firm. It is viewed as being less of a risk and more likely to be able to repay its debts in full. That makes the debt more valuable – and expensive to buy.