Q23. An analyst is considering a bond with the following characteristics:

• Face value = $10.0 million

• Annual coupon = 5.6%

• Market yield = 6.5%

• 5 year maturity

At issuance the bond will:

A)   provide cash flow from investing of approximately $9.626 million.

B)   increase total liabilities by $10.0 million.

C)   increase total assets by $9.626 million.

Q24. Using the effective interest method, the interest expense in year 3 and the total interest paid over the bond life are approximately:

          Year 3 Interest Expense              Total Interest

A)      $634,506                                    $3.17 million

B)      $560,000                                    $2.80 million

C)      $560,000                                    $3.17 million

Q25. A company sells a long-term, zero-coupon bond. The company’s cash flow from operations in subsequent years, compared to what it would have been if the company had issued debt at par for the same proceeds, will be:

A)   overstated.

B)   understated.

C)   properly stated.

Q26. Nomad Company issued $1,000,000 face value 2-year zero coupon bonds on December 31, 20X2 to yield 8% interest. Bond proceeds were $857,339. In 20X3 Nomad recorded interest expense of $68,587. In 20X4 Nomad recorded interest expense of $74,074 and paid out $1,000,000 to redeem the bonds. Based on these transactions only, Nomad’s Statement of Cash Flows would show cash flow from operations (CFO) of:

A)   -$68,587 in 20X3 and -$74,074 in 20X4.

B)   zero in all years.

C)   -$142,661 in 20X4.

答案和详解如下：

Q23. An analyst is considering a bond with the following characteristics:

• Face value = $10.0 million

• Annual coupon = 5.6%

• Market yield = 6.5%

• 5 year maturity

At issuance the bond will:

A)   provide cash flow from investing of approximately $9.626 million.

B)   increase total liabilities by $10.0 million.

C)   increase total assets by $9.626 million.

Correct answer is C)         

First we must determine the present value of the bond. FV = 10,000,000; PMT = 560,000; I/Y = 6.5; N = 5; CPT → PV = 9,625,989, or approximately $9.626 million. The entries to record the issue (all in $ million) are: increase (debit) to cash of 9.626, an increase (debit) to unamortized bond discount of 0.374, and an increase (credit) in long-term-debt liability of 10.0. At issuance, the university will receive cash flow from financing of $9.626 million.

Q24. Using the effective interest method, the interest expense in year 3 and the total interest paid over the bond life are approximately:

          Year 3 Interest Expense              Total Interest

A)      $634,506                                    $3.17 million

B)      $560,000                                    $2.80 million

C)      $560,000                                    $3.17 million

Correct answer is A)

§   Interest expense in any given year is calculated by multiplying the market interest rate (at time of issuance) by the bond carrying value. For example, in year 1, interest expense = 9,625,989 × 0.065 = 625,689. Since the coupon payment = 10,000,000 × 0.056 = 560,000, the interest expense is “too high” by 65,689, and the carrying value of the bond is increased (through a decrease in the unamortized bond discount account) to $9,691,678. In year 2, using a similar calculation, the carrying value of the bond increases to $9,761,637. Thus, the interest expense in year 3 = 9,761,637 × 0.065 = 634,506, or approximately $0.635 million.

§   Total interest expense is equal to the amount paid by the issuer less the amount received from the bondholder.

Amount paid by issuer = face value + total coupon payments
= 10,000,000 + (0.056 × 10,000,000 × 5) = 12,800,000
Total interest paid over the life = 12,800,000 – 9,625, 989 = 3,174,011, or approximately $3.2 million.

Q25. A company sells a long-term, zero-coupon bond. The company’s cash flow from operations in subsequent years, compared to what it would have been if the company had issued debt at par for the same proceeds, will be:

A)   overstated.

B)   understated.

C)   properly stated.

Correct answer is A)

Cash flow from operations (CFO) is systematically “overstated” when a zero-coupon bond is issued because the interest on a zero-coupon bond never reduces operating cash flow. The amortization of the bond discount at maturity is charged to financing cash flow when, in fact, it should be charged against CFO. Thus, CFO will be overstated.

Q26. Nomad Company issued $1,000,000 face value 2-year zero coupon bonds on December 31, 20X2 to yield 8% interest. Bond proceeds were $857,339. In 20X3 Nomad recorded interest expense of $68,587. In 20X4 Nomad recorded interest expense of $74,074 and paid out $1,000,000 to redeem the bonds. Based on these transactions only, Nomad’s Statement of Cash Flows would show cash flow from operations (CFO) of:

A)   -$68,587 in 20X3 and -$74,074 in 20X4.

B)   zero in all years.

C)   -$142,661 in 20X4.

Correct answer is B)

All of the cash flows for zero coupon bonds are included in cash flow from financing activities and none in cash flow from operations.

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