Module IV· InterestAdvanced
Question
How do you treat 'original issue discount' (OID) in interest calculation?
Answer
Mechanics
OID = the difference between the face debt and the cash actually paid out. It is amortized over the term as additional interest expense.
Deep diveShow more details
Example
TLB $200m face, issued at 99% (1% OID), 7-year term.
| Item | Value |
|---|---|
| Face debt | $200m |
| OID (1%) | $2m |
| Net cash proceeds | $198m |
| Annual OID amortization (straight-line) | 2 / 7 = $0.286m |
| Stated coupon | 7% |
| Effective coupon (approx.) | 7% + (0.286 / average balance) ≈ 7.15% |
Impact in the model
- Cash interest = face × coupon (e.g. 200 × 7% = $14m cash)
- Reported interest expense = cash interest + OID amortization (e.g. 14 + 0.286 = $14.29m)
- Cash interest coverage uses only cash interest
- Reported coverage uses total interest expense
Common pitfalls
- Forgetting OID in the cash flow → wrong coverage ratio
- Effective-interest method (IFRS 9) instead of straight-line amortization — differs over longer terms
Pitch tip
Question: "Where do you see OID in the cash flow statement?"
Answer: "OID is non-cash — it shows up in the cash flow as an add-back (operating activities). In the model as a separate line, not in the cash coupon"