### CFA Practice Question

There are 520 practice questions for this study session.

### CFA Practice Question

Deerfield Industries has just issued 5% annual coupon bonds with a face value of \$75,000,000 at a market yield of 4.75%. The bonds have a 10 year maturity. How much interest expense and CFO will Deerfield report for the first year?
A. Interest expense of 3,750,000 and CFO of -3,750,000
B. Interest expense of 3,632,114 and CFO of -3,632,114
C. Interest expense of 3,632,114 and CFO of -3,750,000
Explanation: The market value of bonds at the time of issuance is calculated by discounting future cash flows at the market yield of 4.75%. Coupon payments are based on 5% of face value of 75,000,000.

Bond issue value: PMT = 3,750,000; N = 10; I/Y = 4.75; FV = 75,000,000; CPT PV = 76,465,565
Deerfield will show a bond liability of 76,465,565 and CFF equal to the face value, 75,000,000.
Year 1 interest = 0.0475 x 76,465,565 = 3,632,114. Deerfield will show an interest expense of 3,632,114 and a CFO of -3,750,000 (i.e., 5% of face value).