CFA Level 1 | FRA: Accounting for Bond Amortisation - Effective Interest Rate Method
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CFA Level 1
Topic: Financial Reporting & Analysis
Reading: Non-Current (Long-Term) Liabilities
For accounting for bond amortisation and calculation of interest expense, the effective interest rate method is required under IFRS and preferred under US GAAP.
In this video, I illustrate the effective interest rate method for a discount bond, premium bond and par bond. I show both the calculation (manually) and then with the AMORT function in the Texas BA II Plus. Understand the formula, then use the built-in function to increase the efficiency of the computation.
Take note that in the [AMORT] function:
P1 = Start period
P2 = End period
BAL = Ending balance at the end of P2
PRN = Total principal repayment (from P1 to P2)
INT = Total interest expense (from P1 to P2)
Before you can use the [AMORT] function, the values in the TVM Worksheet have to be populated (N, I/Y, PV, PMT, FV).
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