- 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
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.
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. |