3 ms·

Wait, was the concept of interest abolished while I wasn't looking?

by Bud 8y ago

skookumchuck 8y ago
Accrued interested is added to the Liability as time goes on, but it is not there on Day 0. Furthermore, businesses borrow money in order to use it to increase assets, not just sit in a pile.
- kbenson 8y ago
  > but it is not there on Day 0. I'm pretty sure there are loans where it is, or at least a portion of it is, or at a bare minimum there's an early repayment fee. It would not surprise me to learn that in the world of business finance, these happen. It also wouldn't surprise me to learn that these are used creatively to shift money between entities.
  - skookumchuck 8y ago
    I've borrowed plenty of money in business without such fees, and I'm a pipsqueak nobody.
    - kbenson 8y ago
      I didn't mean to imply these loans were the norm, just that I believe they exist, while your prior comment seemed to imply they did not.
GlennS 8y ago
The interest can be treated as finance cost, and amortized over time. Rather than going straight on the balance sheet, it goes on the income statements (which are change in balance sheet) a little bit each statement period. This makes the company's performance look less spiky, making it easier to reason about (from a pure profit/loss perspective, not a cashflow one) and less scary to shareholders. It also matches with the way the rest of the balance sheet is reported (current value). For example: if you have some aspect of the business which you believe will appreciate in value over time, you probably shouldn't immediately book the increase at the as-yet unrealized future value.
airstrike 8y ago
It didn't, but companies don't issue debt just to have it sit on their balance sheet. Presumably, the additional capital is put to use in projects with an expected return that is greater than the cost of capital (usually the weighted average between (i) the equity holder's required return on equity and (ii) the cost of debt that is usually expressed in the form of the interest rate, to keep it simple). Taking on debt is always done with the purpose of creating value. Sometimes it fails, but that doesn't mean failure was the objective. LBOs aren't evil.

Wait, was the concept of interest abolished while I wasn't looking?

by Bud 8y ago

Wait, was the concept of interest abolished while I wasn't looking?

Accrued interested is added to the Liability as time goes on, but it is not there on Day 0. Furthermore, businesses borrow money in order to use it to increase assets, not just sit in a pile.

kbenson 8y ago
> but it is not there on Day 0. I'm pretty sure there are loans where it is, or at least a portion of it is, or at a bare minimum there's an early repayment fee. It would not surprise me to learn that in the world of business finance, these happen. It also wouldn't surprise me to learn that these are used creatively to shift money between entities.
- skookumchuck 8y ago
  I've borrowed plenty of money in business without such fees, and I'm a pipsqueak nobody.
  - kbenson 8y ago
    I didn't mean to imply these loans were the norm, just that I believe they exist, while your prior comment seemed to imply they did not.

GlennS 8y ago

The interest can be treated as finance cost, and amortized over time. Rather than going straight on the balance sheet, it goes on the income statements (which are change in balance sheet) a little bit each statement period. This makes the company's performance look less spiky, making it easier to reason about (from a pure profit/loss perspective, not a cashflow one) and less scary to shareholders. It also matches with the way the rest of the balance sheet is reported (current value). For example: if you have some aspect of the business which you believe will appreciate in value over time, you probably shouldn't immediately book the increase at the as-yet unrealized future value.

airstrike 8y ago

It didn't, but companies don't issue debt just to have it sit on their balance sheet. Presumably, the additional capital is put to use in projects with an expected return that is greater than the cost of capital (usually the weighted average between (i) the equity holder's required return on equity and (ii) the cost of debt that is usually expressed in the form of the interest rate, to keep it simple). Taking on debt is always done with the purpose of creating value. Sometimes it fails, but that doesn't mean failure was the objective. LBOs aren't evil.