Bond amortization where accounted for?

CFA Level II FRA
#1

Hi Everyone,

My question relates to what is recorded in the Income Statement of the Investor in case of a discount or premium bond (held to maturity) classified as financial asset:

  • only the interest? (i.e. PV x effective interest rate?)

  • or is the amortization towards par reflected on the I/S as well (and not only on the B/S)?

I probably should know this from LI and yet. I’m confused.

Thanks in advance for your help.

#2

The amortization shows up in the interest expense (= book value × YTM at issuance, if you’re using the effective interest rate method) on the income statement; the interest expense will be the coupon payment ± the amortization (plus if you’re amortizing a discount, minus if you’re amortizing a premium).

Take a look at the bond examples (the last two examples) here: http://financialexamhelp123.com/amortization-tables/.

#3

Thank you very much S 2000.

OK so finally the amount shown on the I/S is equal to the interest expense (which is either coupon PMT + amortization for DB, or coupon PMT - amortization for PB). Is this correct?

I think I found out why I was confused. The example I was doing is a par bond, where certainly coupon % = interest rate.

The new CFAI curriculum has even more complicated sentences than last year…

#4

Correct.

You’re quite welcome.