Just to confirm, say I’m holding a $100,000 bond with a 9% coupon to maturity and it was priced to yield 10% = $96,209 (say it is still trading at this price). If it is available for sale, I’m going to recognize interest revenue of $9,000 on my income statement; now for the calculation of free cash flow, I’m net income will include the $9,000, but I would have to add back the amortization of the discount of $620.9 (10% * 96,209 = $9,621.0 - $9,000 = $620.90), to the free cash flow, correct? I can’t find a decent explanation of this in the books and i know that accretions/amoritization of bond premiums/discounts are considered non-cash charges that require adjustments. Thanks.
i think it’s the other way around. you recognize the coupon + amort of discount on the IS. however the actual cash flow is just the coupon ($9000), so for a discount bond your CFO is overstates and CFF is understated, right?
I know that if you hold the bond to maturity, you recognize the whole $9620.9 in your I/S, that’s where my head’s at. Maybe it is a bit too late for this type of question.
this is L1 stuff i think, not that i know it well or anything. if you hold the bond to maturity, you recognize the total coupon payments plus the discount, which is fully amortized by the time you get to maturity. this is why YTM is higher than coupon when a bond is issued at a discount.
Mate, I’m well aware about how to calculate an amortization on a bond and its significance. I’m talking about its adjustment to the free cash flow as part of non-cash charges. I haven’t really seen anywhere in the book where they made this adjustment, but I know theoretically you would have to make this adjustment as part of non-cash charges, just looking for confirmation or if anyone else has encountered this.
Are you referring to FCFF? Add INT(1-T) to your calc and be done with it.
yes, sorry, didn’t read your question all the way through. agree with bpdulog. add int(1-t) and move on.
No, no - see I am referring to interest INCOME from securities and how to recognize the amortization of the discount in the free cash flow. NOT adding to INT(1-Tc) to FCFF which reflects interest EXPENSE.
pvalka Wrote: ------------------------------------------------------- > No, no - see I am referring to interest INCOME > from securities and how to recognize the > amortization of the discount in the free cash > flow. NOT adding to INT(1-Tc) to FCFF which > reflects interest EXPENSE. Sorry mate, my eyes are getting heavy since its late around here. You would add the amortization back, but I don’t think this will show up on the exam. But by me just saying that, watch it come up on the exam…