Can anyone summarize the cash flow impacts based on the different sources of financing of liabilities? I am finding it extremely difficult and volatile to understand this concept. And what sort of questions can we expect in this section? Thanks for your help.
hmmm the way i remember it is by thinking of a t-ledger, and think of the accounting entries required. so, to account for increased liabilities: DR Cash CR Liability therefore, cash increases…
I am talking about the study session 10 in FSA where it talks about the various CFO, CFF effects and also the difference for different types of bonds. Anyway of remembering them?
ahhh ok, i have my way of remembering them, not sure how technically correct it is, but it works… i’ll give it a go, but forgive me if im wrong, im almost falling asleep… ok, so, for a DISCOUNT bond… the coupon amount will be relatively HIGHER (as a portion of the market value) than if it was a par bond (eg. $100 coupon/$980 vs $100/$1000) therefore, CFO will be HIGHER/OVERSTATED (and CFF will be understated) and vice versa… like i said, dont know if this is technically correct, but this is how it works in my head…
Thanks a lot Bluey…Thats a good tip… Right or wrong… atleast a good way to remember it…
Wait a min, Isn’t that, premium bond has higher coupon, so higher operating cash out flow, so CFO understated?
I remember it as POU and DOO just say it out loud as Po and Du Premium cfO Undervalue Discount cfO Overvalue
Another way to look at it is: For a Discount Bond, the coupon is lower than the yield (that’s why it’s a discount bond). So subtraction from CFO is lower than what it should be for a Par Bond. So CFO is overstated.