- CFA Exams
- CFA Exam: Level I 2021
- Study Session 14. Fixed Income (1)
- Reading 42. Fixed-Income Securities: Defining Elements
- Subject 4. Structure of a Bond's Cash Flows

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**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 ______.

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

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.

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**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. |