CFA Practice Question

CFA Practice Question

The cash flow classification of debt payments depends on the ______.
A. current yield and coupon rate.
B. coupon rate and effective interest rate.
C. yield-to-maturity and effective interest rate.
Explanation: The cash flow classification of debt payments depends on the coupon rates and the effective interest rate. When these differ, cash from operations is misstated.

User Contributed Comments 8

User Comment
humphrey what's classification? determining a cash flow as operation, investment or financing cash flow? then what does it have to do with coupon rate or interest rate? coupon rate and interest rate only determines how much should be recorded on the 'cash flow from operations' statement
jason classification means classifying cash flows as CFO, CFI, or CFF. When coupon rate is higher than effective interest rate, then you must reclassfiy the cash flows.
wollogo Not 100% sure but I think the difference between the coupon and effective rate gets allocated to cash from financing because you are effectively repaying some of the principal by reducing the book value of the premium. For sure total cash paid = coupon payment, it is just split up in the cash flow statement.

With a discount, you would think that the entire coupon would be allocated to CFO because it is less than the effective interest rate, can't see how you would split it.
dimanyc i think they are talking about the classification for the amortization of bond premiums and discounts here.
iambroke Coupon payment is cfo and principle is cfi....but what happens to the amortized premium or discount?...the balance sheet value of debt is reduced or increased by the amortization....but what about the cashflow ( amortization is a non-cash charge)
teje Yea, here they are referring to bond amortizations...

if coupon rate > effective interest rate --> bond trading at premium, CFO will be understated and CFF will be overstated.

if coupon rate < effective i-rate --> bond trading at discount, CFO overstated and CFF will be understated.

Need to adjust accordingly...
moneyguy good summary, teje. Thanks :)

Good Luck to everyone next month!!
rabihCH I am an engineer, how the hell did I sign up for this! I should have stuck to my trade.
Good luck guys.
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