Interest Expense

For the issuing company, interest expense reported for the bonds in the financial statements is based on the effective interest rate.

(Institute 569)

Institute, CFA. 2016 CFA Level I Volume 3 Financial Reporting and Analysis. CFA Institute, 07/2015. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

I’m a bit confused as to what this means. What interest expense? The bond only pays coupons, so the interest expense is a coupon? In which case it’s not at effective interest rate but at the coupon rate.

A little further down it states:

More-precise bond valuations use the interest rate applicable to each time period in which a payment of interest or principal occurs.

(Institute 569)

Institute, CFA. 2016 CFA Level I Volume 3 Financial Reporting and Analysis. CFA Institute, 07/2015. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

So I’m guessing this is referring to the same interest as mentioned in the first statement in which case I’m confused.

Further down still there’s yet more indication of an interest expense on bonds:

For bonds issued at face value, the amount of periodic interest expense will be the same as the amount of periodic interest payment to bondholders.

(Institute 572)

Institute, CFA. 2016 CFA Level I Volume 3 Financial Reporting and Analysis. CFA Institute, 07/2015. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

I have no idea what this interest expense is.

For interest expense, you start with the actual coupon, then take into account any premium or discount at issue. Premium reduces your overall interest expense, whereas discount increases it.

Since IFRS is so market value focused, using a different interest rate each period sounds like an effort to reflect a “current” cost of debt. This is not the same as the effective interest rate: this rate is basically the IRR of the cashflows at issue.

Oh interest expense is the amount of amortisation that happens on the premium/discount?

There you go.