Total Interest Expense

CFA Level I
#1

Hi guys, what’s the easiest way to compute the total interest expense that will occur over the life if bond? (in an accounting sense) For example, assume a discount bond. Many thanks!

#2

For a Discount Bond = Face Value + Coupon Payment(s) - Bond Price. For a Premium Bond = Bond Price + Coupon Payments - Face Value I hope I am right about the 2nd one here… (Premium).

#3

cpk, I believe the formula you provided for discount bonds works for premium bonds also (as well as bonds trading at par and zero coupon bonds). I don’t think that the second formula works.

#4

brilliant, thanks!

#5

Ler me recast cpk’s formulas to make it clearer ( i think the second one is off) For a Discount Bond = Coupon Payment(s) + (Face Value - Bond Price) Since the discount is extra interest For a Premium Bond = Coupon Payment(s) - (Bond Price - Face Value) Since premium reduces interest

#6

So Super – Essentially in both cases it is the Same Coupon Payments + Face Value - Bond Price. (Taking out the -ve signs, and simplifying) So we have ONLY 1 FORMULA to remember :slight_smile: CP

#7

And it makes sense, too… :wink: thanks guys

#8

Quick question here: Interest expense - each payment is computed by multiplying the market rate at issuance by the book value, correct? So essentially we use the market rate as the interest rate? This formula seems to be doing that through taking the difference between the face and proceeds from the initial offering and adding it to the coupon. Does anyone know if the BV is the price at which the issue was sold or face?

#9

mar350 Wrote: ------------------------------------------------------- > Interest expense - each payment is computed by > multiplying the market rate at issuance by the > book value, correct? Payments are the coupon, not the yield )or market rate) at which the bond is issued. Payment is not the same as expense. Payment plus/minus discount/premium amortization gets you interest expense. >So essentially we use the > market rate as the interest rate? Not just essentially, but actually. > This formula seems to be doing that through taking > the difference between the face and proceeds from > the initial offering and adding it to the coupon. Read above and take a nother look > Does anyone know if the BV is the price at which > the issue was sold or face? ooooohh, I know this one… The BV is face plus/minus unamortized premium/discount.

#10

Ok, so payment = coupon. Int. exp. = coupon + amortization. Amortization = (market rate at issuance +/- coupon rate) x face?