so what are u saying about the interest expense, over stated? NOrtheastern Student?
When you pay coupons, that interest expense hits CFO. When you repay principal, that expense hits CFF. While the loan is in place, there is no interest expense being paid out (i.e. zero coupons), so for a multi-year zero, your CFO is not going to have any cash flows from the interest payments that you would have needed to make if you had a coupon bond. On repayment of the zero, I’m not sure exactly how things work - I’d appreciate knowing. The principal component of the bond repayment is definitely CFF. The interest portion ought to be attributed to CFO, but might be included in CFF instead. If the former, then what happens is that CFO is understated in years when no zeros are due, overstated when due, but average out multiyear about the same. If the latter, then CFO is consistently understated.
I think that interest Expense would be considered understated because of the following reason Amount rec. from zero coupon is smaller than discount bond - Say 100,000 for zero coupon If Market Rates are 10% Interest Expense for Yr 1 is = 10,000 vs Discount = 110,000 Interest Exp = 11,000
agree with tennis ball. By the same principal, debt issued at a premium will have overstated CFF and understated CFO Premium Discount (includes 0 coupon debt) Interest CFO understated CFO overstated Principal CFF overstated CFF understated