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CFA Level I · CFA Level I Exam · Analyzing Balance Sheets

A company buys a five-year bond for 1,000,000 at par on 1 January, incurring no transaction costs. It pays a 4% annual coupon, and the bond is classified at amortized cost. At year-end, market rates have risen and the bond's fair value is 950,000. The carrying amount on the balance sheet at year-end (ignoring expected credit losses) is closest to:

The carrying amount is about 1,000,000. The bond was bought at par, so the effective interest rate equals the coupon rate and no premium or discount is amortized. Under amortized cost, the fall in fair value to 950,000 is ignored, and the paid coupon does not increase the carrying amount.

  1. A950,000
  2. B1,000,000Correct
  3. C1,040,000

Explanation

Bought at par, the effective rate equals the coupon rate, so there is no discount or premium to amortize. Carrying amount stays at 1,000,000 after the coupon is paid. The 950,000 fair value is ignored under amortized cost. 1,040,000 wrongly adds the coupon to the carrying amount.

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