Fair Value Reporting Debt Confusion

[d-bid]

I’m having a little trouble understanding gains/losses under Fair Value Reporting for debt. So if a bond is reported at fair value, and the interest rate increases, that means the bond’s value on the balance sheet (liabilities) decreases. Why is this considered a gain? Interest payments aren’t going down.
Also, one of the examples in Schweser said that when interest rate increases, a firm would repurchase their debt because of lower prices. This lowers the firm’s liabilities, but won’t their interest payments increase then?
I’d really appreciate if someone could help out! Thanks!

 

[S2000magician]

Let’s say that you issue $1,000,000 of 10-year, 6% coupon, semiannual pay bonds at par. You record a liability of $1,000,000. If you were to try to pay off that debt today, you’d have to pay $1,000,000.
One year later, interest rates rise to 7%. The market value of the bonds is now $934,052. You reduce your liability by $65,948.
It’s a gain because you could buy the debt on the open market today and retire it for $934,052 instead of for $1,000,000.
The interest payments don’t change; they’re fixed at $60,000 per year.

 

[d-bid]

Thanks for clarifying the interest payments part!
I think I understand the gain part now. So if I repurchase the debt, would this be what will happen to the balance sheet?:
Assets: bonds increase $934,052($1mil, 10 yr, 6% semiannual), cash decrease $934,052
Liabilities and Equity: bonds decrease $65,948 ($934,052 bonds balance), gains increases $65,948