dcbreber Wrote: ------------------------------------------------------- > we are comparing two different situations. but if > you are calculating the interest expense on a bond > or what the issue price is, you have to use what > the ytm is right now. I get where you guys are coming from, i am just saying basically that schweser did it this way and thats how I look at it. Given numbers it is easy to see why a discount bond would have a lower IE. However, I do believe that there could be a question that compares the same bond @ different YTM’s, and we get our answers from there, thats all
saurya-cfo is overstated in the zero coupon bond situation because when the company does its cash flow statement (see page 474) they add back discount amortization. with a premium bond, they would subtract premium amortization from cfo. you see that the discount is subtracted on p 475 to adjust the cfo.
getterdone Wrote: ------------------------------------------------------- > Dreary Wrote: > -------------------------------------------------- > ----- > > If you fix the YTM and vary the coupon rate, > which > > is the correct way, then clearly CFO under a > > premium bond is overstated, since you are > > deducting the full coupon payment, while in > > reality you should only deduct the interest, > which > > is less than coupon. Correct? > > > Under schweser is says that CFO is understated and > CFF is overstated for premiums, > > thats what I am going with however I understand that my ration is for the 2 same bonds @ different YTM’s, under the assupmtion you guys are making i understand those fundamentals as well
ILets see, you will record interest expense on the income statement as coupon payment. Lets say that’s $5000. However, interest expense in economic terms is (say) $4600. So your NI is understated, since we deducted too much. When you calculate CFO, you subtract premium amortization from NI, which would make CFO even more understated, may be that’s correct now.
Dreary Wrote: > -------------------------------------------------- > ----- > > If you fix the YTM and vary the coupon rate, > which > > is the correct way, then clearly CFO under a > > premium bond is overstated, since you are > > deducting the full coupon payment, while in > > reality you should only deduct the interest, > which > > is less than coupon. Correct? I think if you are deducting more (coupon) than the actual interest expense, the CFO is understated?
Dreary, I am not saying that you guys are wrong, i will say again, you guys are right with your examples. Do you have schweser books by any chance?
I don’t have Schwewser… but this was a good discussion.
Dreary Wrote: ------------------------------------------------------- > I don’t have Schwewser… > but this was a good discussion. lol yes it was, I only studied from schweser and in that section it only gives examples of bonds issued @ different YTM’s. I see where you guys are coming from though, because the fundamentals are correct. I think that if either of us see either way on the exam we will be golden I think these discussions are the reasons why AF’s seem to do well on the exams