- CFA Exams
- CFA Exam: Level I 2021
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 28. Non-current (Long-term) Liabilities
- Subject 1. Accounting for Bond Issuance, Bond Amortization, Interest Expense, and Interest Payments
CFA Practice Question
Gemstone Company issued $1,000,000 of 20-year, 6% bonds. The carrying value at the issue date is $980,000. The market rate of interest at the issue date is ______.
B. greater than 6%
C. less than 6%
A. exactly equal to 6%
B. greater than 6%
C. less than 6%
Correct Answer: B
The bonds were issued at a discount (the carrying amount is lower than the face amount) because the market rate (also called yield rate or effective rate) is higher than the coupon rate. The discount compensates investors for the unattractively low coupon rate.
User Contributed Comments 4
| User | Comment |
|---|---|
| Will1868 | The yield moves inversley with the price |
| Jurrens | You would have to assume since price is lower than value, so they're selling at a discount meaning the rate in the market is higher |
| 2014 | when discount; market is more than coupon rate. When premium; coupon rate is more than market rate |
| gill15 | Everything seems SOOO EASY now that taxes are done. |