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CFA Level I · CFA Level I Exam · Topics in Long-Term Liabilities and Equity

A company issues bonds at a premium. Over the life of the bonds, relative to the carrying amount at issuance, the carrying amount of the liability will most likely:

The carrying amount decreases toward face value. For premium bonds, the cash coupon exceeds the effective interest expense, and the excess reduces the liability each period through premium amortization, so the carrying amount equals face value at maturity.

  1. Adecrease toward face value as the premium is amortizedCorrect
  2. Bremain constant until maturity, when the premium is written off
  3. Cincrease toward face value as interest expense exceeds the coupon

Explanation

With a premium, the coupon exceeds effective interest expense, so the excess reduces the carrying amount each period until it equals face value at maturity. The option describing an increase confuses premium with discount. Constant carrying amount applies only to bonds issued at par.

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