When I think of zero coupon bonds, what I think of is that no cash is exchanged until maturity. With discount bonds, your CFO is overstated and CFF is understated. Zero coupon bonds are a type of discount bond, so this applies to them as well. So my understanding is that with zero coupon bonds, all the cash “payment” is out of CFF. But how does this make sense if there’s no cash payment? It’s just an amortization. Am i making any sense here?
All I know is that CFO is overstated and CFF is understated. Don’t ask me why 
Think about it, debt is a CFF. It is issued with the assumption that interest is being paid. In the case of a zero, no interest is paid. Therefore, CFF does not ‘amortize’ throughout the life and is reflects the constant debt. To balance this, CFO is overstated since the company is using the cash for whatver. The CFO does not amortize lower as a par bond so it is overstated.
Here’s a quick example to hopefully help: If you sell a par-value bond at a 10% discount rate, you initially record $1000 for CFF because that’s what you are beind paid initially to issue the bond. If you sell a zero-coupon bond, you would only receive the PV of $1000, discounted at 10% initially. Therefore, the CFF that you put down for a zero-coupon bond would be much lower than for a regular bond.
but no cash is actually exchanged. so how is this an outflow out of cff. this question applies to regular discount bonds as well. or for premium bonds too. the amortization is a noncash expense so why cff?
Cash is exchanged when the par value is paid out at maturity.
So for a zero, cash flows are: Issuance: CFF inflow = PV of par value payment Maturity: CFF outflow = Par value You’re right that no cash has been paid out in the intervening time period. So the payments that would ordinarily have been paid out as CFO (coupon payments) haven’t been made. Instead it’s all in the final par CFF payment, which is why it’s sold at a deep discount. Hence there are none of the coupon pmts that would have been made for an ordinary bond, and CFO is thus higher. But because of this it’s sold at a deep discount so the initial CFF in is lower. Thus CFO overstated, CFF understated.
the show NY Wrote: ------------------------------------------------------- > but no cash is actually exchanged. so how is > this an outflow out of cff. this question applies > to regular discount bonds as well. or for premium > bonds too. the amortization is a noncash expense > so why cff? From my understanding, when a bond is accounted for on an issuer’s books, the cash received from the issuance of the bond flows to CFF. So it is not an outflow of CFF but an INFLOW. From my example above, the inflow from a zero-coupon bond would be less than that of a comparable regular bond; hence, CFF is understated with a zero-coupon bond because there is a lower amount initially recorded as a cash INFLOW. I’m not sure if I’m addressing the issue correctly, but let me know if that helps or I’ll keep trying!
swellsrf Wrote: ------------------------------------------------------- > Here’s a quick example to hopefully help: > > If you sell a par-value bond at a 10% discount > rate, you initially record $1000 for CFF because > that’s what you are beind paid initially to issue > the bond. > > If you sell a zero-coupon bond, you would only > receive the PV of $1000, discounted at 10% > initially. > > Therefore, the CFF that you put down for a > zero-coupon bond would be much lower than for a > regular bond. yep i get all that. but say the pv is 700. youre the issuer so you record CFF +700. Over the life of the bond, your amortization increases until you reach 1000 at maturity. Then you repay 1000, so CFF -1000. My question is, over the life of the bond, why is the 300 being recorded at CFF. No cash is being exchanged.
HJAA Wrote: ------------------------------------------------------- > So for a zero, cash flows are: > > Issuance: CFF inflow = PV of par value payment > Maturity: CFF outflow = Par value > > You’re right that no cash has been paid out in the > intervening time period. So the payments that > would ordinarily have been paid out as CFO (coupon > payments) haven’t been made. Instead it’s all in > the final par CFF payment, which is why it’s sold > at a deep discount. > > Hence there are none of the coupon pmts that would > have been made for an ordinary bond, and CFO is > thus higher. But because of this it’s sold at a > deep discount so the initial CFF in is lower. > > Thus CFO overstated, CFF understated. totally get it now, thanks a lot
yea it is, when you make coupon payment, it consists of int and amortization. Int portion is accounted in CFO amortization in CFF
no life, thats the thing that confused me initially. amortization is accounted for as CFF. but amortization is not a cash flow. so how can it be acocunting for under CASH FLOW from financing
Amortisation is not a CF. It’s definitely not in CFF. It’s used to increase the value of a discount bond to par for accounting purposes. The CFF is only at sale of the bond and maturiry as above.