Bond Discount/Premiums CFO?

[noseykibitzer]

The Interest expense on the income statement increases over the life of the discount bond and decreases for a premium bond...

For discount bonds they say that CFO is misstated, is this because the coupon is the only Cash Payment, and difference between "interest expense" and the coupon payment is the actual amortized discount which technically is a CFF because it is an increase in the carrying amount of the bond liability?

For Premium Bonds, the "interest expense" is reduced over the life of the bond and is the Coupon - amortized premium, and the amortized premium is also a CFF as it is a reduction in the carrying amount of the liability?

Does this all make sense?...the reason I asked is because I saw a question that stated a discount bond "overstates" CFO. If this is the case then would a premium bond "understate" CFO because a portion of the coupon payment goes to reduce the amortized liability and is a CFF. I agree that CF's are misstated because of the discrepancy between the reported interest expense and to where the actual CF are attributable.

Or are the coupon and the amortized portion both considered CFO and are they just mentioning this misclassification stuff just to make me confused enough to put it on this board.

Anyone who can figure out what I am trying to convey here...feel free to give your perspective.

 

[JeffJ21]

has anyone in reality delt with a set of financials where bond interest expense destroyed ur analysis because it wasnt issued at par. lol......... its just a bond man

 

[noseykibitzer]

You didn't answer my questions?

 

[jamespucyk]

CFO = Coupon x Par Value
IS = Book Value x Bond Discount Rate (Which based upon the comparison to the above calculation is equal to the amount the bond premium or discount is amoritized)

Naturally speaking the amoritization is not reflected on the CFS and only the coupon calculated interest is used for the cash adjustment for interest. I know in the text they don't explain it thoroughally. I.e. what should be shown on the CFO is The second calculation, but instead the C*P = I is used, this means that Interest is TOO LOW, which means CFO is TOO HIGH. To remedy this amoritization of the bond plus the implied interest calculation reflected on the IS should be used.

On the converse when a bond is issued a premium C*P is higher than the interest that is on the IS then Interest is TOO HIGH and this mean CFO is TOO LOW.



Edited 2 time(s). Last edit at Wednesday, April 19, 2006 at 10:56AM by jamespucyk.