- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 28. Non-current (Long-term) Liabilities
- Subject 1. Accounting for Bond Issuance, Bond Amortization, Interest Expense, and Interest Payments

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**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

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**User Contributed Comments**
10

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! |