Final answer:
Interest paid is shown as an operating or financing activity in the cash flow statement under IFRS and as an operating activity under US GAAP. The current value of interest-bearing instruments like bonds is affected by changes in market interest rates, where an increase in rates lowers the present value of future payments.
Step-by-step explanation:
Under both IFRS and US GAAP, the amount of interest paid is typically reflected in the cash flow statement. In the statement of cash flows, interest paid can appear in either the operating or financing activities section, depending on the entity's accounting policy choices.
For IFRS, interest paid can be classified as either operating or financing cash flows. Under US GAAP, interest paid is usually classified as an operating activity.
Furthermore, the example provided indicates the impact of changing interest rates on the present value of future cash flows.
Although the actual dollar payments remain the same when interest rates rise, the present value of these payments is lower if discounted at the new higher rate. This essentially decreases the value of the investment since future cash flows are worth less today.
If you're considering the context of buying loans in the secondary market, the value you ascribe to these loans will be more or less depending on several factors.
For instance, if interest rates rise after a loan has been issued, a potential buyer in the secondary market might pay less for that loan since its payments are not as valuable compared to new loans issued at current higher rates.