The Effective Interest Method: Amortised Cost Schedules for Loans & Bonds with Fees, Discounts, Premiums and Changed Cash Flows

What you'll build

What you will be able to do

Each lab ends with a concrete result that you build yourself and the checker confirms, cell by cell.

• See why the interest in the books is not simply the coupon: an upfront fee is part of the lender's return, and spreading it straight-line makes the implied yield drift from year to year.
• List every contractual cash flow including the fee, find the effective interest rate with IRR and turn a half-yearly rate into an effective annual rate with POWER.
• Build Brightwater's amortised cost schedule: interest income at the effective rate, the coupon received, the fee amortisation in between and a carrying amount that climbs from 97,000 to 100,000.
• Find the effective rate of a bond bought below par and one bought above par, build the discount bond's schedule up to par and see why the premium bond earns less than its coupon.
• Measure Calder Mills' loan liability net of its transaction costs, find the borrower's effective rate and build the interest expense schedule up to the 200,000 that is repaid.
• Find the effective rate of a zero-coupon note with POWER, compute its interest income in a later year and show how a step-up loan earns more interest than cash in its early years.
• Revise Loan A's expected cash flows for an early repayment, recalculate the carrying amount at the original effective rate and book the difference as a catch-up adjustment.
• Roll Loan A forward year by year, measure the fee still unamortised, post the year-1 journal entries and chart the carrying amount climbing to par.