Bond's interest expense and coupon payment

CFA Level I FRA
#1

Dear all,

Can anyone clarify the following:

Interest expense in Income Statement :

  • the amount is interest expense or the coupon payment? I understand that for par bond there will not be any issues; but what if the bond is issued at discount/premium.

Interest in Cash Flow Statement :

  • from Schwesers Notes it seems to suggest that the interest refers to the bond coupon payment.

Thank you. smiley

Cheers,

Ernest

#2

Interest expense on the income statement includes the coupon payment(s) due plus amortization of any premium/discount.

Interest paid on the statement of cash flows is the interest paid; i.e., the coupon payments made.

#3

Awesome! Understood and thanks so much S2000magician :slight_smile:

#4

You’re quite welcome.

#5

Hi S2000 - Can you elaborate on “plus amortization of any premium/discount”?

Interest expense on income statement = amount of interest accrued by the firm in a period of time.

Amortization is your paying down of said debt?

What am I missing here?

Thanks so much

#6

S2000magician is trying to say that:

For income statement

If it is a _ premium _ bond; interest expense (on income statement) will be = Coupon Payment _ less _ amortization premium

If it is a _ discount _ bond; interest expense (on income statement) will be = Coupon Payment _ add _ amortization discount

If it is a par bond; interest expense (on income statement) will be the same as coupon payment; no amortization discount/premium in this case.

For cash flow statement,

The interest paid recorded will be just the coupon payment itself (for both premium and discount bonds) as amortization expenses are non-cash; and hence ignored when computing cash flows.

For par bond, once again it will not be an issue as the interest paid is the same as the coupon payment.

#7

Ahh ok thank you Snow. Not into fixed income yet.

#8

The above can be found under FRA. Thanks.