honeycfa

For a given amount of financing, issuing which of the following bonds will result in the largest overstatement in cash flow from operations (CFO) compared to issuing a bond at its face value?

A) Convertible bond.

B) Premium bond.

C) Zero-coupon bond.

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The zero-coupon bond will most likely cause cash from operations to be overstated by the greatest degree. This is because they pay no cash interest during the life of the bond and the entire amount of the interest expense is derived from amortizing the discount of the bond.

honeycfa

Which of the following statements about bonds issued at a discount is FALSE?

A) Cash flow from operations will be overstated and cash flow from financing will be understated.

B) The original liability will be higher than the bond's par value.

C) Interest expense will have an upward trend for each period.

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Bonds issued at a discount will have an original liability that is lower than the bond's par value.

honeycfa

The actual coupon payment on a bond is reported on the statement of cash flow as:

A) a financing cash outflow.

B) an investing cash outflow.

C) an operating cash outflow.

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The coupon payment is recorded on the statement of cash flows as an operating cash outflow because cash flow from operations includes a deduction for interest expense.

honeycfa

Assuming all else equal, if the coupon rate offered on a bond is less than the corresponding market rate of interest, the bond will be issued at:

A) a premium.

B) a discount.

C) par.

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If the coupon rate is less than the market rate, the bond must be sold at a discount so the effective rate on the bond equals the market rate.