The 200m bond has coupon rate of 6% and yield of 6.5%. If the yield declines to 5.5%, Reported interest expense will be: More than 12m? The answer says this is because the amortization of the discount will be added to interstate expense . What does it mean? Will the bond value vary from the year to year changing yield or is the bond yield fixed at the beginning?
Because the initial yield exceeds the coupon, the bond was issued at a discount. That discount is amortized over the life of the bond, increasing the interest expense every year. (Think of if this way: they should have issued a 6.5% bond, not a 6% bond, so their interest expense should be higher.)
The issuing company doesn’t show a change in the value on its balance sheet when market yields change; the YTM at issuance is the only yield that matters.
Here the bond is issued at discount because the coupon rate is less than YTM. It means the interest expense will go up continuously.
And only YTM does matter.