Held-to-Maturity Bonds on 3 Statements
I cannot wrap my head around how HTM bonds affect the three statements. No modeling course is good at explaining this (let alone AFS and Trading).
Scenario 1: Here’s a random example I made up using some YT vid data. Assume Company A buys Company B’s 3yr bond with FV of $1M. Market rate of 7%, ann. coupon of 9%, so PV 1,052,486. Lets assume Company A has 20% taxes.
Year 0: Nothing in PL. Cash outflow under CFI. Cash goes down 1,052,486 and investment account up 1,052,486. Bang.
End of Year 1: This is where I struggle. Coupon income of 90K should hit income statement. Bottom line goes up 72 (20% tax). Assuming the ~16K in amortization doesn’t impact my CF statement, so cash just goes up 72. My investment account goes down ~16K and my retained earnings will go up (72-~16) and balance out. Is this right?
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Scenario 2: Imagine we’re now dealing with a zero-coupon bond. Per some websites, this should go on the PL. But then that doesn’t make any sense because if so, then I would have to back out the amortization of principal from my cash-flow statement (= to my entire income amount) in order to get to net change in cash of 0. (small DTA with taxes). That messes me up because in scenario 1 I don’t back-out any amortization.----
Help :( :( :(
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