CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

All of the following statements about the effects of changing interest rates on the market value of debt and on financial statements and ratios are true except:
A. financial ratios will not be impacted by changes in market interest rates.
B. only when interest rates drop and the value of the outstanding debt increases would the firm be required to revalue the book value of its debt.
C. if a company was to buy back its bonds at a discount to their book value, then it would have to record an extraordinary gain.
Explanation: The book value of the debt would not be impacted by what is prevailing in the markets. Thus, even as the market value of a firm's bond fluctuates by the hour, it will have no impact on the debt's book value.

User Contributed Comments 10

User Comment
steved333 Only when more debt is issued...
jpducros mmm, is that true under both US and IFRS ?
MylesGrenier I thought an extraordinary gain had to be both unusual and infrequent. What is unusual about buying back bonds at a discount?
poomie83 I can say that it certainly is not usual. A firm issues bonds to raise cash and if it buys back at a discount then the firm has made a profit from debt (ignoring interest payments)
acemaj Most firms aren't in the business of making a profit on bonds they issue, so when they do, it's unusual.
ColonelCFA I have the same thought as MylesGrenier, the extraordinary was more in line with nature disasters and the like. Really not common events. But I guess a company buying back their own bonds at a discount is that rare.
jjhigdon Buying bonds back at a discount is probably rare since if the bonds are tading at a discount, it probably means rates have risen and the outstanding bonds are paying below market coupon rates. A company wouldn't want to buy them back and then have to issue new debt at the higher rate. Morelikely, a company would look to call any bonds trading at a premium.
majsajab can anybody elaborate on "financial ratios will not be impacted by changes in market interest rates"
berylzheng financial ratio will not change since no revaluation required
berylzheng LIFO liquidation means cash saved as there is no replacement of inventory purchased in current year. Therefore cash flow is higher.
You need to log in first to add your comment.