Page 5 - FINAL CFA I SLIDES JUNE 2019 DAY 9
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Session Unit 8:
31. Non-Current (Long-Term) Liabilities
LOS 31.b: Describe the effective interest method and calculate interest expense, amortisation of bond
discounts/premiums, and interest payments., p.275
Example: Book values and cash flows, p.275. On December 31, 20X2, a company issued a 3-year, 10% annual coupon
bond with a FV of $100,000. Calculate the BV of the bond at year-end 20X2, 20X3, and 20X4, and the interest expense
for 20X3, 20X4, and 20X5, assuming the bond was issued at a market rate of interest of (a) 10%, (b) 9%, and (c) 11%.
(a) Market rate of 10% -this would be a par bond!
tanties
Year (1) (2) (3) (4 )
Beginning BV Interest Expense (1) % 10% Coupon Ending Book Value
20x3 $100,000 $10,000 $10,000 $100,000
20x4 $100,000 $10,000 $10,000 $100,000
20x5 $100,000 $10,000 $10,000 $100,000
