Zero coupon describes a cash-flow pattern, not an absence of financing cost. Opening carrying amount is below maturity value; each period's effective interest increases the liability even though no coupon cash leaves the issuer.
The maturity payment includes the accreted financing component. A complete schedule reaches that amount from the supplied issue price and yield without a late catch-up entry.
Accrete the discount to maturity
ASC 835-30-35-2 treats the difference between present value and face amount as discount or premium and amortizes it as interest over the note's life. A zero-coupon note has no periodic coupon cash, but it still has effective interest.
Suppose an issuer receives $75,131 for a $100,000 amount due in three years at a supplied 10 percent annual yield. First-year interest is $7,513.10 and raises carrying amount to $82,644.10. Later interest grows with the carrying base. The final balance reaches $100,000 before payment, subject to the stated precision and rounding policy.
Put the concept to work
Apply this concept
- Accrete a supplied zero-coupon debt issue from present value to maturity amount through effective interest while showing zero periodic coupon cash.
Learning resources
Choose a lesson, try an application, or inspect the sources behind this concept.
Build on these ideas
- Effective-interest method for debt — Analyze
To apply this concept: Required. Interest expense is recognized through carrying-amount accretion.