- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 14. International Trade and Capital Flows
- Subject 4. The Balance of Payments
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.
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.
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 |
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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. |