Question about bond interest income income

tango_gs

Just want to make sure I understand the concept:

Let's suppose a bond is issued at par with a coupon of 5%. Face value is $1,000 and coupon is annual. The coupon payment won't change as that will always be $50. However the yield ($50/face value*100%) WILL as the value of the bond moves up and down in the market. So, you're still getting $50 of interest income it's just that the coupon may be plus/minus an amort. premium or discount and will sum up to $50. Right?

busterbluth

pretty sure the bond premium/discount ammortization is part of the interest expense... pretty sure

5566

If the bond was bought at a premium then the actual reported income would be smaller than the face par yield.

Newhuman

You guys are again way overthinking. Interest expense is simply calculated as Amortized Cost * YTM. Done.



Edited 1 time(s). Last edit at Wednesday, June 8, 2011 at 05:23PM by westibbs.

Kapie

psriniva Wrote:
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> For a good discussion and example, see Page 70 of
> Schweser's Financial Reporting and Analysis book
> 2.


I did but that only talks about a bond bought at a discount. Regardless... based on the example u outlined above the interest income is definitely not Par Value x Coupon so 2,500 is wrong. Fk me

iteracom

ZeroBonus Wrote:
-------------------------------------------------------
> so what's the process for a bond bought at a
> premium?
>
> interest income = original P * original interest
> rate?
>
> or do we add the amortization premium and get back
> to 2500?

I am not recalling any 2500 number that you are talking about.

But extending my earlier example above, if the bond is being sold at a premium, the coupon of 5% is above the market interest of say 4% at the time the bond was purchased.

Again, as mentioned by jps1, the interest income for the first year will be 1050 * 0.04 = $42.
So, coupon of $50 minus $8 amortization of premium = $42 is what is recorded in the income statement for year 1.
The bond's carrying value in the balance sheet at the end of the first year is $1,050 minus $8 amortization = $1,042.

Best of luck to you all in your forthcoming exams.

madaochenggong

For a good discussion and example, see Page 70 of Schweser's Financial Reporting and Analysis book 2.

Best of luck to you all in your forthcoming exams.

liquidity

ZeroBonus Wrote:
-------------------------------------------------------
> so what's the process for a bond bought at a
> premium?
>
> interest income = original P * original interest
> rate?
>
> or do we add the amortization premium and get back
> to 2500?

original P * original interest is the way to calculate total interest expense
which will equal to coupon +/- discount/premium amortization

random_walker47

cruzjuan Wrote:
-------------------------------------------------------
> I don't know for what stupid reason I thought the
> amortization would appear as a separate entry on
> the Income Statement. You know the concept, you
> know how to work the exact numbers, but you are
> not clear on an irrelevant accounting standard
> that fatefull morning.
>
> -1


-2

DSquaredSlim

Suppose you bought a $1000 Face value bond which had a 5% coupon paid annually for a price of $950.
Further, suppose that the interest rate in the market for a bond of this type with similar risk is 6%.

In other words, you bought the bond at a discount. Because you bought the bond for $950 while the face value is $1000. If you held the bond until it matures, you will get $1,000.
The discount bond you bought will issue a coupon of $50 annually because the coupon is paid at 5%. Because the bond is paying only 5% when the market interest rate is 6%, the bond is available for a discount of $50 (1000 minus 950)

Also, upon purchase, the bond will be recorded in the Balance sheet at $950.
Cash reduced by 950 and securities up by 950 in your balance sheet.
Every year the bond's value will steadily increase to $1,000 in your balance sheet. For example, if the bond has 5 years to maturity, the value of the bond in your balance sheet during the second year will be equal to 950 + amortization of discount during the first year. The bond will be valued at $957 in the balance sheet in the second year, because the amortized amount is $7.
The amortized amount can be calculated as follows.
The total interest income recorded in the Income statement in the first year will be $57 - $950 * 0.06 = $57. (6% was the market interest at the time of issuance).
Out of the $57, $50 is coupon interest (actual cash received) and then $7 is the amortization of the bond towards par of $1000.