Bonds (CFO & CFF)

CFA Level I
#1

Can anyone explain why for a premium bond that the CFO is understated and CFF is overstated while for a discount bond the CFO is overstated and CFF is understated. I’m trying to make sense of it but i just don’t get it. Thanks

#2

For a premium bond, the interest expense is lower ( since the amortization of the premium account is counted towards the coupon payment) and hence CFO is lower.

#3

For premium bonds CFO is understated (CFF is overstated) because the cash coupon is higher than interest expense. Consequently, for discount bonds CFO is overstated (CFF is understated) because the cash coupon is lower than interest expense.

#4

interest expense belongs to CFO and coupon payments belong to CFF correct?

#5

thanks guys

#6

@Ancientmtk…I wouldn’t put it exactly that way. Interest expense belongs to CFO and the difference between Coupon Payment and interest expense belongs to CFF as that amount is used to either amortize the premium or the discount.