Cash flow adjustment

Premium bonds:
higher cash coupon ->CFO is understated;

Discount bonds:
lower cash coupon -> CFO is overstated;

zero coupon bond:
the coupon understated the cash components of interest expense & CFO is overstated
i.e. no coupon =>CFO has no interest expense deducted =>severely understate interest expense and overstate CFO;

Analyst should:
· make adjustment which is positive for premium & negative for discount bond.