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 8
| 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? |
| msabanka | I think sunday128 has a point. Anyone care to weigh in? |