- CFA Exams
- 2021 CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 28. Non-current (Long-term) Liabilities
- Subject 1. Accounting for Bond Issuance, Bond Amortization, Interest Expense, and Interest Payments

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**CFA Practice Question**

The Mod Company issued a zero-coupon bond on January 1, 20x0, due December 31, 20x4. The face value of the bond was $100,000. The bond was issued at an effective rate of 14% (compounded annually). The CFO before interest and tax in each year is $60,000. EBIT in each year is $70,000.

The times interest earned in 20x2 is ______.

Correct Answer: 7.407

Interest expense = (51,937 + 7,271 + 8,289) x 14% = $9,450

Times interest earned = EBIT/interest = 70,000/9,450 = 7.407

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**User Contributed Comments**
12

User |
Comment |
---|---|

skrien |
The no. of years to discount face value to caculate present value is 5, not 4. Start date is 1 Jan 2000. 100,000/(1+0.14)^5 = 51,937. That's the price the zero was sold at. 2000 interest: 51937 * 0.14 = 7271. 2001 interest: (51937 + 7271) * 0.14 = 8289. 2002 interest: ((51937 + 7271 + 8289) * 0.14 = 9450. |

Piersy |
Also discount zero-coup 3 yrs, to find 2002 PV = 67,497 2002 interest = 67,497 * 0.14 = 9,450 |

Shelton |
as i=14%, I = 100k * v^3 *14%=9449.6; TIE=EBIT/I = 70,000 / (14% * 100,000*1.14^-3) = 7.40077 |

Rotigga |
N = 5 years!!!! 1/1/00 to 12/31/04 is 5 years!!!! Discounted value of bond = $51,936.87 12/31/00 Interest accrued = $7,271.16 Balance owed = $59,208.03 12/31/01 Interest accrued = $8,289.12 Balance owed = $67,497.15 12/31/02 Interest accrued = $9,449.6 Balance owed = $7,6946.76 TIE = EBIT / Interest Expense = $70,000 / 9449.6 = 7.41 |

msns |
The no of years according to me should be 4 because the interests get paid only at the end of the year. The other logic is if you work back from Dec 31, 2004, the PV on 1st Jan 2003 will be 100000/1.14-$87719, on 1st Jan 2002 will be 87719/1.14=$76947, on 1st Jan 2001 will be 76947/1.14=$67497 & on 1st Jan 2000 will be 67497/1.14=$59208. Thus there are 4 years and not 5. Hence the calculation for Times Interest Earned will also change accordingly. |

steved333 |
msns: Your logic is incorrect. 1/1 to 12/31 is a year. 1/1/00 to 12/31/04 is 5 years- the years 2k, 2k1, 2k2, 2k3, and 2k4. That's five years, so five is right. You are correct that interest is only accounted for at the end of the year, but there are five with which to work. I like Piersy's approach. Since there are three years remaining at the beginning of 20x2, discount back 3 years and take 14% of that. Good call. |

rfvo |
Agreed, good call Piersy |

2014 |
Piersy thanks good short cut |

johntan1979 |
Save your time using TI BA II Plus: N=5, I/Y=14, FV=100,000 CPT PV=-51,936.87 2ND PV, then to get the 20x2, which is the 3rd period, enter 3 for P1, scroll down with the arrow key, enter 3 for P2, and scroll down further until you reach INT=9,449.60 Multiply that with the EBIT of 70,000, you'll get the answer. (Time taken = less than 1 min) |

gill15 |
If you guys think Skierns way is long...something is wrong....it's a good way of learning logic as well...makes every question simple.. |

forry9er |
annoying ... the 5 years instead of 4 threw me off. Read questions carefully. |

sshetty2 |
JT you gotta divide EBIT (or operating income) with the interest expense in 20x2 |