CFA Practice Question

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CFA Practice Question

The coupon payments to a domestic investor from a foreign bond are represented as a ______ entry in the ______ account.
A. credit; current
B. debit; current
C. debit; financial
Explanation: Income on foreign investments is part of the current account.

To determine whether it is a debit or a credit entry, remember that, by convention:
1. Any inflow of domestic currency represents a credit and any outflow of domestic currency represents a debit on the BOP account.
2. Any inflow of foreign currency represents a debit and any outflow of foreign currency represents a credit on the BOP account.

Since the coupon income represents an inflow of domestic currency (from the foreign exchange markets, where the coupon payments in foreign currency were converted to domestic currency), it is a credit entry.

User Contributed Comments 8

User Comment
keithinny why is the payment from a foreign bond not a foreign currency receipt rather than domestic currency ? If I own a Yen bond I get paid Yen. Why does the answer asume this is converted to domestic currency when the question gives no hint of that?
haarlemmer Whatever the currency the payment is, it is to be converted into domestic currency when you receive it.
mtcfa The definition of a foreign bondis that it is issued by a foreign counry but in the currency of the domestic market... ie Yankee bond.
CoffeeGirl foreign bond : coupon in US, inflow of domestic money , credit in current account
dblueroom regardless what currency is used to pay coupon, it represents an cash inflow. The coupon represents interest income, thus a credit in current account. please distinguish investment income vs. capital investments (affect financial account).
JoshCA that's odd. Outflow Domestic Debit.
Batoold89 Interest is always in the current account, principal is in the financial account.
If a resident receives a payment from abroad it's a credit entry, if a non-resident receives a payment from the domestic economy it's a debit entry.
dbalakos Think it differently the resident has bought the bond which was debited to the financial account. As interest is paid the bond is depreciated through credits in CA.
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