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

Under IFRS, a company issues bonds at a discount and measures them at amortized cost using the effective interest method. Compared with the coupon paid in cash each period, the interest expense recognized in the income statement is most likely:

Interest expense is higher than the cash coupon. With a discount bond, expense is carrying amount times the market yield at issuance, which equals the coupon plus discount amortization, so the liability carrying amount increases toward face value over time.

  1. Ahigher than the coupon, because the discount amortization is added to itCorrect
  2. Bequal to the coupon, because the coupon rate is fixed
  3. Clower than the coupon, because the discount reduces the carrying amount

Explanation

For a discount bond, the effective interest expense equals the coupon plus the amortization of the discount. The carrying amount rises toward face value, so expense exceeds cash paid. The option claiming it equals the coupon ignores amortization, and the third has the relationship reversed.

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