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

Under IFRS, an issuer sells a bond at a discount to its face value. Compared with a par bond with the same coupon, over the life of the bond the issuer's interest expense reported in profit or loss will most likely be:

Interest expense will be higher than the coupon payments. The discount is amortized over the bond's life under the effective interest method and added to the cash coupon, so the carrying amount rises to face value at maturity.

  1. Alower than the coupon payments
  2. Bequal to the coupon payments
  3. Chigher than the coupon paymentsCorrect

Explanation

A discount bond is issued for less than the amount repaid at maturity. Under the effective interest method, the discount is amortized and added to the coupon, so interest expense exceeds the cash coupon each period. The carrying amount rises toward face value.

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