Discount Bond - CFO


Just to Confirm Discount Bonds = CFO Overstated, CFF understated Premium Bonds = CFO Understated, CFF Overstated Zero Coupon = CFO Severly Overstated, CFF Severly Understated The reasoning is this and please correct if I’m wrong. Discount bonds the coupon is less than interest expense. Interest is charged to CFO, is it overstated because of the amortization should be charged to CFF?

i think the easiest way to remember is to compare everything to a bond issued at par the discount bond has coupon rate < market rate and the par has coupon rate = market rate, so CFO will be overstated for the discount bond b/c of the higher market rate, and CFF will be understated b/c you’re receiving less money from the discount bond

Yeah, I can remeber it but I wanted to know what actually happen. I think it’s because the additional amortization get added back to CFO when computing making it overstated when it should technically be CFF (But we use GAAP) Can anyone confirm thats why?

i remember it by this: discount bond is coupon