take an extreme case, zero coupon bond, which is sold at a discount. the coupon payment from CFO is zero. the interest expense from CFI is amortized discount. my questions: is this interest expense an artificial expense, which has been add to balance sheet liability, so over time, when it is time to maturity, the amount of that zero coupon bond is equal to its par? if it is the case, is there any true out cash flow for zero coupon bond before maturity? that interest expense appear on CFI, is it a negative value or positive? how we really process this amount ? (like dose it really reduce net income? )? Thanks.
good question, i’d like to know how this works as well
YEs interest expense is ammortized over the term of the zero coupon bond so that its value is same as the face value at maturity. CF is zero. Only cash flow that occurs is cash flow from financing on purchase and redemption. Interest expense is always CFO unless u are the investor.