- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 25. Non-Current (Long-term) Liabilities
- Subject 1. Accounting for Bond Issuance, Bond Amortization, Interest Expense, and Interest Payments
CFA Practice Question
A company issued 6-year, 10% bonds on September 1, 2015, for $91,619. The bonds have a maturity value of $100,000 and pay interest semi-annually on March 1 and September 1. The market rate of interest at the date of issue was 12%. The company has an accounting year-end of December 31. The amount of interest expense on March 1, 2016, is ______.
A. $1,832
B. $1,839
C. $2,000
Explanation: The interest expense for the six months from September 1, 2015, to March 1, 2016, would be $5,497 ($91,619 x .06). On December 31, 2015, four months would be recognized in the amount of $3,665 ($5,497 x 4/6). The rest of the interest, two months, would be recognized on March 1, 2016. This amount would be $1,832 ($5,497 - $3,665).
User Contributed Comments 8
| User | Comment |
|---|---|
| hrai1 | tricky!! |
| danlan | It is 91619*0.12*2/12=1832 |
| xcye | Tricky, didn't count the month right |
| copus | This makes no sense to me. The fact that the bond was issued at a discount due to the fact that the market interest rate was above the coupon rate is irrelevant with regards to coupon payments. Interest is paid on the notional value ($100,000) and the coupon rate is 10% (not the market rate of 12%). What am I missing here? |
| copus | oops, my bad. Have just read the LOS and I am way wrong! |
| gill15 | I was smashing my head cause I couldnt get this. It actually had a trick which I'm happy about becasue without the trick....I was doomed... |
| praj24 | Great question! |
| tomalot | What does it mean that interest was "recognized" on 31 December? |