The Effective Interest Method: Amortised Cost Schedules for Loans & Bonds with Fees, Discounts, Premiums and Changed Cash Flows
See why interest in the books differs from the coupon: effective rates from all cash flows including fees, amortised cost schedules for loans and bonds bought at a discount or premium, and catch-up adjustments, with every cell checked as you go.
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About this course
In this course you calculate interest the way the books show it, not the way the coupon says. You compare straight-line fee spreading with the effective interest method, find the effective rate of a fictional loan with IRR over all cash flows including the fee, and annualise half-yearly rates with POWER. You build amortised cost schedules for the lender and the borrower, accrete a discount bond up to par and amortise a premium bond down to it, handle zero-coupon and step-up instruments, recalculate the carrying amount with NPV when expected cash flows change, book the catch-up adjustment, post the journal entries and chart the roll-forward.
Lessons
- Why Effective Interest: Coupon, Fees and Straight-Line Spreading Pro
- The Effective Interest Rate: IRR of All Cash Flows, Annualised with POWER Pro
- The Lender's Schedule: Carrying Amount × EIR = Interest Income Pro
- Bonds at a Discount or Premium: Accreting and Amortising to Par Pro
- The Borrower's Side: Transaction Costs, Interest Expense and the Liability Pro
- Zero-Coupon and Step-Up Instruments: No or Rising Coupons, One Smooth Rate Pro
- Changed Expected Cash Flows: Recalculated Carrying Amount & Catch-Up Adjustment Pro
- Journal Entries & Roll-Forward: Opening, Interest, Cash, Closing Pro