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).

User Contributed Comments 5

User Comment
danlan Use Amort, set P1=P2=1, and we get Int=3632114
StanleyMo interest expense and CFO could be difference.
poomie83 I just learnt something...interest expense shown on the income statement will not necessarily match the actual interest paid using cash.
homersimpson CFO includes expenses and partial principal repayment. Proceeds from selling bond are debited to CFF.
MonuPanda so when a company issues a bond does it get the present value of the face value or entire face value ?
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