can someone please explain to me why amortization of long term bond discounts is added back to FCFF, and amortization of long term bond premiums is subtracted? thanks
amortization is a NCC. hence you add/subtract it. If stated Interest > Effective Rate ==> Premium bond; Interest payment will be higher than Interest Income If stated Interest < Effective Rate ==> Discount Bond; Interest income will be higher than Intt payment For a discount bond, you are converging towards par, by adding more and more amortization. For a premium bond, you are converging towards par, by reducing your amortization.
It’s an adjustment to NI, when you add non cash charges back to it to get CFO. So any non cash charge will be added and gain will be subtracted from NI adjustment. There is a classic example of restructuring charges in FCF chapter in CFAI curriculum. Do that and it will be crystal clear
thanks guys, cleared it up a little. just one more thing, can you clarify what you mean with effective rate and stated interest rate? Thanks
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