CFA Practice Question
A company with a 10-year bond issue of 7% coupon, paid annually, face value 10,000,000, sold at a market yield of 6.8%, will report
A. a discount of 141,780 and a CFF of 10,000,000.
B. a premium of 141,780 and a CFF of 10,141,780.
C. a premium of 141,780 and a CFF of 10,000,000.
Explanation: The present value of the bond issue is: PMT = 700,000; N = 10; I/Y = 6.8; FV = 10,000,000; CPT PV = 10,141,780.
This represents a premium over the face value: Premium = 10,141,780 - 10,000,000 = 141,780.
User Contributed Comments 5
| User | Comment |
|---|---|
| PedroEdmundo | CFF is equal to the proceeds and the proceed is the present value not the face value. At the maturity date u decreased the CFF by the Face value. |
| ontrack | this can be solved visually! Since coupon rate is > yield, it has to be a premium bond (elimates choices A and D). Next, since it is a premium bond, CFF will be greater than face value=> option B. Impressed? |
| zkhan87 | no |
| tommyguard3 | Thank's Pedro, I had the 141,780 premium but didn't understand the CFF but that makes sens. |
| Ifi2703 | Remember, CFF is the actual physical cash that came in after you sold your bonds - since you sold at a premium the cash that came in would obviously be bigger than the face value so the clear answer would be B. |