CFA CFA Level 1 Bond issuance sample question

Bond issuance sample question

  • This topic has 1 reply, 2 voices, and was last updated Jul-18 by Stuj79.
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      Hi guys, I have a quick question and I am unable to understand how this work:

      Example: KTJ issues an 8%, 10-year annual-pay bond when market yield is 7.5% for $1034.32. The impact of the bond on net income in the first year is:

      A) $80 and NI is less than with equal proceeds from par debt
      B ) -$77.57 and NI is more than equal proceeds from par debt
      C) -$77.57 and NI is the same as with equal proceeds from par debt

      The answer is C because issuing a par value bond doesn’t have a par value of $1000 but instead it has $1034.32. He expects the interest expense to be the same. So if we get $1034.32 from our premium bond, we need to get the same 1034.32 when we issued par value bond. 

      I don’t understand why the answer is C and the last sentence on same value from premium bond and par value bond. can someone help?

      Thank you!

    • Stuj79

      Where does this question come from if I may ask? I must say, the last statement is confusing me also….doesn’t seem to make sense.

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