CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

The promised cash flows for an annual-pay deferred coupon bond with three-year deferral period, 10 years to maturity, 8% coupon rate and $1,000 par value are ______.

A. $0 for years one-three; $80 years four-nine; $1,080 year ten
B. $80 for years one-three; $259.71 year four; $0 years five-nine; $1,000 year ten
C. $0 for years one-two; $259.71 year three; $80 years four-nine; $1,080 year ten
Correct Answer: C

For two years, interest is deferred. Coupon payments for years one-three plus accrued interest are paid at the end of year three. From year four onwards, the promised cash flows are identical to a typical annual-pay coupon bond. The future value of an annuity of three payments of $80 using an 8% rate of interest is $259.71.

User Contributed Comments 11

User Comment
lijia1 3 year deferral period means accrued interest will be paid at the end od year 3? I feel it should be paid in the 4th year.....
nija It should be paid at the end of the third year.
bobert If it was paid at the end of year 4, then it would be deferred for 4 years. Don't overthink it to much.
ljamieson 80*1.08^2+80*1.08+80=259.71
cong The accured coupons are payable at the end of the deferred period (ie end of year 3).
Bobokoko what do you enter into calculator??
CFALucille 3 N
8 I/Y
80 PMT
CPT FV
slipleft a good formula to know:
[((1+r)^t -1)/r]*payment
[(1.08^3 - 1)/.08]*80
quanttrader Why would the accrued payment not be just be 3*80 = $240. Coupon is 8% on 1000 so $80, where does it mention that the $80 is being reinvested at a mkt rate of 8%?
narenk 8% Coupon Rate applies to all Cash Flows generated.
jonan203 quanttrader:

since the bond interest is deferred the firm must pay interest on coupon payments that have not been paid to the bond holders.
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