CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

The Mod Company issued a zero-coupon bond on January 1, 20x0, due December 31, 20x4. The face value of the bond was \$100,000. The bond was issued at an effective rate of 14% (compounded annually). The CFO before interest and tax in each year is \$60,000. EBIT in each year is \$70,000.

The times interest earned in 20x4 is ______.
A. 5.7
B. 6.85
C. 1.46
Explanation: Interest expense = (51,937 + 7,271 + 8,289 + 9,450 + 10,773) x 14% = \$12,281

Times interest earned = EBIT/interest = 70,000/12,281 = 5.7

User Comment
billou expense is simply 100,000-100,000/1.14=12,281
NufaNka 100000 - 100000/1.14 = 12281
70000 / 12281 = 5,7
Shelton ICR(TIE)=EBIT(\$70k) / I(14% * \$100k/(1+14%))=5.7
gaur Though zero coupon bonds do not pay interest, it is accounted for. Thus in its last year the interest cost is FV=100,000, n=1, i=14% thus PV = 87,719.3. Therefore Interest (Implied) = 100,000-87,719.3=12,280.7.
EBIT = 70,000 & Interest = 12,280.7 Therefore Times interest earned = 5.7
alki gaur, you are the man...
viannie thanks gaur ... u make it really simple to understand!
azramirza fv=100000, n=4 I/y=14% pv=59208. Since it is a zero coupon bond no interim interest payments. So go to 2 ammort on t2 cal...and equate p1=4 and p2=4 press down..int=12280
homersimpson thanks azramirza, i was wondering about n=4, too!
arendb Questions asks for 20x4, so therefore:
x0 is n = 1
x1 is n = 2
x2 is n = 3
x3 is n = 4
x4 is n = 5
birdperson azra - nice one. i somehow didn't know about the amort function very helpful!