CFA Practice Question

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CFA Practice Question

On January 1, Pathways Corporation sells $500,000 of 10-year, 5% bonds at a yield of 6%. The bonds pay interest annually each December 31. At the time of the sale, the bond discount was $36,818. What is the interest expense for that year?

A. $23,159
B. $27,791
C. $30,000
Correct Answer: B

Interest expense is based on the carrying value of the bonds, which is the face value less the discount ($500,000 - $36,818, or $463,182). Interest expense is $27,791 ($463,182 x .06 effective rate).

User Contributed Comments 2

User Comment
kalps Yield is the same as the implicit interest rate i.e. cost to the comany that is issueing the bond given the discount amount. Learn terminology
ashish100 FFuu,.. now this one was a tricky one. first you go easyyy. then fuuU!!
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