CFA Practice Question

CFA Practice Question

On January 1, 20X5, a firm sells bonds of face value $5,000,000, 10 years to maturity. Annual coupon rate is 7.5%, paid semi-annually. Market rate of return at which the bonds are sold is 6.25% per annum (six-month rate annualized). Bonds are sold for Cash. Long Term Debt (right hand side of B/S) on Dec 31, 20X5 increases by:
A. $5,459,593.25
B. $5,000,000.00
C. $5,702,545.03
Explanation: The bonds are sold at a premium, but the increase in Long Term Debt is only the face value $5 M. The rest (the premium) goes into a liability account (not a long-term debt) called Premium (which is amortized down to zero over the life of the bonds).

User Contributed Comments 7

User Comment
chandsingh What would happen if the bond is discounted?
scottm8571 Don't confuse the balance sheet with the cash flows. The CFF is answer A, but the balance sheet will show LTD of 5mm.
Mikehuynh Agree with scottm8571: CFF = $5,459,593.25 while the B/S records only $5,000,000
hoyleng thanks scott
enetis good call!!!
santibanez The carrying value of the bond would be 5 459k = long term debt (5000k)+ premium liability (459)
sunday128 Shouldn't CFF = 5,000,000 because that is the actual Cash Flow while recorded liability as 5,459,593?
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