- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 25. 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**

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

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.

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.

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**User Contributed Comments**
5

User |
Comment |
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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. |