Question

Why are interest expenses rarely equal to interest payments on a bond?

Answer 1

Bonds are generally issued at a rate which is not equal to market rate of interest. When a bond is issued at a rate more than market price then bond is issued at premium and when interest rate of bond is lower than market rate then bond is issued at a discounted price.

This bond premium and discount is amortized over the life of the bond in the form of interest on bond.

When bond is issued at premium then interest on bond is lower than cash payment for interest. On the other hand when bond is issued at discount then interest payment is more than cash paid for interest.

Although if a bond is issued at a rate equal to market rate then bond is issued at par. In this situation Interest expense on bond is equal to interest payment of bond.

This is the reason why Interest expenses is rarely equal to interest payment in cash.