Skip to content

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

Under IFRS, a company issues a bond at a discount and applies the effective interest rate method. Over the life of the bond, the interest expense recognized each period will most likely:

Interest expense will most likely increase each period. Under the effective interest method, expense is the market rate times the opening carrying amount, and amortizing the discount raises the carrying amount toward face value, so the expense grows over time.

  1. ADecrease each period as the discount is amortized
  2. BRemain constant and equal to the coupon payment
  3. CIncrease each period as the carrying amount rises toward face valueCorrect

Explanation

With a discount bond, interest expense equals the effective rate times the opening carrying amount. The discount amortization increases the carrying amount each period, so interest expense rises. Constant expense equal to the coupon would apply only to a bond issued at par.

Did you get it right without looking?

One question tells you little. A timed set on Topics in Long-Term Liabilities and Equity shows your real accuracy, how long you take and where you lose marks.

Practise Topics in Long-Term Liabilities and EquityFree diagnostic mock

More Topics in Long-Term Liabilities and Equity questions