FSA Premium/Discount bonds

Can someone explain what happens when a firm issues bonds at either a discount or a premium, and the effect of both on cash flow from operations as well as cash flow from financing as they relate to interest expenses and amortization? I’m a bit confused on why CFO and CFF are either overstated and understated in the two scenarios, and how int. expense and amortization are calculated and the general logic behind all this? Thanks

use the Search function – I believe you will find plenty of posts on this in the past, within the forum. even something as close as a week ago. CP

Bonds issued at a discount have a market rate of interest that is greater than the coupon rate at issuance. Think of the coupon rate as the rate that determines that actual cash flow. Imaginge you have a debt liability of x. The interest expense each period, as determined by the market rate at issuance, adds to that liability. The cash outflow as determined by the coupon rate, reduces this liability. If the period interest expense > coupon payment, then the total liability increases each period (increasing from the discounted value to the PAR value). If the interest expense < coupon payment, the liability gets smaller each period (decreasing from the premium value down to the PAR value). CFO for discounted bonds are overstated (the interest expense is too low) as portion of the interest expense (the amount in excess of the coupon payment) is being allocated to CFF in the form of amortization of the discount. As such, the CFF are understated. Zero coupon bonds are the extreme example. Nothing flows through CFO, so CFO is EXTREMELY overstated. The entire interest expense is amortizing the discount and flowing through CFF