# Why Did the Book Value Decrease for Discount Notes? Let's break down the situation step by step using the table you provided: | Maturity Date Book Value (9/30/2) | Value (930/202) | Stated Rate | Effective Rate | |---------------|------------------------|------------------------|-------------|---------------| | 8-Jul-29 | $2,035,300 | $1,748,000 | 2.15% | 3.12% | ## Step 1: Understanding Key Concepts - **Issued at a Discount:** Notes are issued at a discount when the stated (coupon) interest rate is **less than** the market (effective) interest rate. - Here, Coupon rate = 2.15% < Market rate = 3.12% - **Book Value of the Note:** The book value (carrying value) is the present value of remaining cash flows (interest and principal) discounted at the market rate when the note was issued. --- ## Step 2: Typical Discount Note Behavior - When a note is issued at a discount, the book value **increases** over time as interest expense (using the market rate) is higher than the cash paid (using the coupon rate). - **Usually, book value goes UP toward face value as the note approaches maturity.** --- ## Step 3: But in Your Case, Book Value Went Down! - Book value **decreased** from $2,035,300 (2022) to $1,748,000 (2023). --- ## Step 4: Why Did This Happen? ### A. **Principal Repayment** - If part of the note's principal was repaid during the year, the book value would decrease. - Is this an amortizing note (installments paid over time)? If so, this would explain the drop. ### B. **Amortization Schedule** - If the note requires payments of principal (not just interest) each period, then each payment reduces the carrying value. - Even if a note is issued at a discount, if principal is being paid off, book value drops. ### C. **No Principal Repayment, Only Interest?** - If **only interest** is paid and no principal, book value should increase (not what happened here). --- ## Step 5: Conclusion **The book value went down because the note is likely being paid down over time (installment or amortizing note), not just interest-only.** - Each principal payment reduces the carrying value (book value) of the note, even though it was issued at a discount. - The discount is still amortized, but the principal repayments "outweigh" the increase from amortization, causing a net decrease. --- ## **Final Answer** > **The book value went down because the note is being repaid in installments, so each principal repayment reduces the carrying value. Even though the note was issued at a discount (so amortization of the discount would usually increase book value), the repayment of principal causes the book value to decrease overall.** --- ### **Summary Table** | Year | Book Value | Explains | |------|------------|----------------------------| | 2022 | $2,035,300 | After some repayments | | 2023 | $1,748,000 | After more repayments | **If you have more details on the payment schedule, I can show the exact calculations!**