CFA Practice Question

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CFA Practice Question

When a firm issues zero-coupon debt instead of coupon debt, ______

A. cash flow from operations is higher.
B. the interest paid at the retirement date is reported in the cash flows from operations.
C. interest expense will decrease each year.
D. the times interest earned ratio will be constant each year.
Correct Answer: A

If zero-coupon debt is issued, there are no interest payments to be made each period and therefore no decreases in cash flow from operations because of interest payments.

User Contributed Comments 3

User Comment
kalps Clearly, zero bonds have no interest payment over life and therefore cash flow form operations will be higher over the bonds like - i.e. no outflows
danlan Interest expense will increase.
viruss Well shouldn't CF from financing be lower ? Issuing a zero coupon is a financing activity according to me
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