- CFA Exams
- CFA Exam: Level I 2021
- 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
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?
B. $27,791
C. $30,000
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!! |