What amount of interest is expensed on a bond interest payment?
What amount of interest is expensed on a bond interest payment?
Whenever an interest payment is made on bonds, amount of interest expensed :
Interest expensed = Effective yield* carrying value
Bonds can be issued at par value, at discount or premium.
Issue of bonds at par value:
when bonds are issued at par value, then interest expense will be coupon rate multiplied by face value of bonds. For example, $20,000 bonds are issued at par value with 10% coupon rate.
Interest Expense = 20,000*10% = $2000 per year
Issue of bonds at discount:
when bonds are issued at discount, then with interest amount discount on bonds will also be amortised and get expensed with interest.
For example, $20,000 bonds are issued at $18,000 with 10% coupon rate and effective yield of 12%
Here, interest expensed = carrying value * effective yield = $18,000*12% = $2160.
Here, $160 extra expense would be for amortisation of bond discount along with coupon interest payment.
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