F5M5 Flashcards
Amortization of bond
allocation of total gain/loss or bond issuance costs are amortized over the life of the bond
When does amortization of premium/discount/issuance costs begin
Amortization begins on the date that the bonds are sold
Straight Line Method of Amortization of Bond
Effective rate is the ONLY GAAP method
straight line may be used if they are not materially different
Straight Line Amortization of Bond
interest expense is a constant dollar amount
the coupon paid is either subtracted by the premium or added to the discount/bond issuance cost
Premium amortization versus Discount amortization
premum subtracted from CV and the discount is added to CV
Effective interest method
required by GAAP
- calculate interest expense (coupon)
- Calculate interest payment (market/effective rate * CV)
- the difference in the two numbers is amortization
Difference between using market rate versus effective rate
market rate: does NOT include bond issuance costs
Effective rate: INCLUDES bond issuance costs
What reflects the actual cost of borrowing
interest expense
Interest expense calculation effective interest method
CV * effective rate
Interest Payment calculation effective interest method
face value * coupon rate
interest payment = coupon
When would the investor and lender entry in bond amortization not match
if there are bond issuance costs
the amortization of the investor would not include bond issuance costs
Accrued interest in BP
really the accrued coupon payment
Pay attention to dates
