CFA Practice Question

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CFA Practice Question

Which of the following statements regarding zero-coupon bonds is not true?

A. Zero-coupon bonds frequently sell at a deep discount.
B. Zero-coupon bonds are popular with borrowers because interest expense is not recognized for financial accounting purposes until the maturity date.
C. If a company uses the effective interest method, the periodic interest expense recognized by the bond issuer will be a smaller amount in the early years of the bond's life than in later years.
D. For zero-coupon bonds, the periodic interest expense recognized is greater than the periodic cash interest payments made.
Correct Answer: B

When there are zero-coupon bonds, there are no cash payments for interest; however, interest expense is recognized each period for the amount of the discount that is amortized.

User Contributed Comments 5

User Comment
danlan It is recognized but not paid. So it affects income statement and not cash flow.
aggabad What about C?
achu C is True: If a company uses the effective interest method, the periodic interest expense recognized by the bond issuer will be a smaller amount in the early years of the bond's life than in later years.

In first year, the Periodic interest = (PV of Face)* i%. A year later, the PV of face is larger, so the Periodic interest is larger since implied i% stays constant.
prachirp D is true: There are no periodical cash payments.
UcheSam @prachirp cash payment is zero. That option is a honey pot.
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