CFA Practice Question

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CFA Practice Question

On January 1, 2015, the Liz-Beth Company issued zero-coupon bonds for $68,301, which resulted in an effective interest rate of 10 percent. The bonds' face value was $100,000 and the maturity date was January 2019. The amount of the discount to be amortized in 2015 is closest to ______.

A. $0
B. $6,830
C. $8,000
Correct Answer: B

The interest expense is $6,830 ($68,301 x 0.10), which is also the amount of the discount to be amortized.

User Contributed Comments 5

User Comment
gjwhite How about, amortisation in 2010: 68301(.05)=3415 in the fist 6 months, (3415 + 68301)(.05)=3586 in the 2nd six months for a total of 3415+3586=7000
Nancyz If interest is counted twice a year, then the effective interest rate is not 10%.
kutta2102 I agree. Although zero coupons don't pay intermediate interest, the balance sheet treatment should be based on an assumption of semi-annual coupon payments unless stated otherwise. I think they just gave this as an illustrative example
endeca It is discounted twice a year but we are talking about the EFFECTIVE interest rate which already considers this factor. I think the answer is correct.
ascruggs92 For those of you arguing the assumption of semi-annual payments, remember that only the stated rate is effected by the number of compounding periods. The effective rate is what you get after taking into account compounding. In short, whether it compounds monthly semi-annually, continuously, etc. is irrelevant to this problem.
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