CFA Practice Question

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CFA Practice Question

On May 1, 2015 Bluefish Co. bought 100 bonds (face value $1,000 and stated interest 10%) of Hawkeye Inc., interest payable semi-annually on July 1 and January 1. The bond price was $920 excluding accrued interest. Due to the short-term nature of the investment, Bluefish put this in the marketable debt securities section of its current assets. At the end of 2015 the income statement should reflect interest revenue of ______ from this investment.
A. There is no interest revenue, since marketable securities are short-term in nature and only the difference between acquisition price and disposition price is calculated as a gain or loss.
B. $10,000, since it received $5,000 on July as bond interest and another $5,000 would be due tomorrow (Jan. 1, 2016)
C. $6,667
Explanation: 100 x $1,000 x 0.1 x 8/12 = $6,667

User Contributed Comments 11

User Comment
Angelique Due to accrual accounting
geet (100*1000*.1/6)+ (100*1000*.1*5/6)
Allen88 (100*1,000*.1*(2/12))+(100*1,000*.1*(6/12))
azramirza agree with allen.
student111 I didnot understand this can anyone please explain :(
teje $10,000 would be the interest you earned on the bond provided you bought the bond on Jan 1 of the beginning of the year. But since you bought it in may, you only get $6,667
teje $10,000 - 6,667 = 3,333 ... this amount would have been the accrued interest you owed the seller of the bond when you originally purchased the bond. Since you will be receiving 10,000 in coupon interest. The 3,333 is the coupon interest that the seller earned for holding the bond for the first 4 months...4/12*10,000
endurance Bluefish is keeping the bonds from May 1 to the end december on the BS. That's 8 months out of 12, meaning: 8/12 x (100 bonds x 1000 face value x 10 percent interest) = 6667 in interest (for accounting purposes)
gill15 What I dont get is that the interest payments Bluefish gets is the coupon payments. The Coupon payment rate is NOT given and only the interest rate is give. How do we know know the interest payments(Coupon payments) are 100?
jasonkwk gill15,

coupon = face value X stated interest

if u read the bond chapter, this should be no problem for u.
rjdelong Yes when they pay the interest does not apply since it's asking for revenue, not cash flow. Knowing that, you have accrued 8/12 months interest. Wham, bam, you're good.
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