- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 11. Intercorporate Investments
- Subject 2. Investments in Financial Assets
CFA Practice Question
Southern Company holds a 10-year bond that it purchased 4 years ago at 1020 and records as held-to-maturity. It receives $40 in cash interest payments. The premium it recorded at acquisition is amortized on a straight-line basis. How much interest income will it report?
A. $40
B. $42
C. $38
Explanation: Interest income for held-to-maturity is equal to interest payments received plus (less) the amortization of discount (premium). The 2% premium on the purchase price is a "cost" that results in the recognition of less interest income as it is amortized over a 10-year period. Interest income for the period is $40 - $2 = $38.
User Contributed Comments 7
| User | Comment |
|---|---|
| turtle | Premium of 2 should be amortised through 10 years. So amount deducted for 1 year is 0,2 not 2. Correct me if I am wrong. |
| ragingrazz | I think they are assuming standard Bond face value of $1,000, which is common. So, premium = $1,000*1.02= $20. $20/10 years = $2/yr. |
| anricus28 | Question asked how much interest is reported (not in one year) therefore I assume over the whole period. And so answer is 40-2 |
| ljuricek | I do not think the whole period should be included. (Answer says "Interest income for THE PERIOD ..." I would tend to believe that information on face value being 1000 is missing in the text question. |
| C2inOC | I suppose that the face being $1000 is implied by the $40 interest, because if it was a $100 face bond...then that would mean it was a 40% coupon. And who has a 40% coupon? |
| mchu | I would agree with ragingrazz |
| davcer | should the price be 980 instead of 1000 we would have to add the discount to have a total of 42 |