CFA CFA Level 1 Bond issuance sample question

# Bond issuance sample question

• Author
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• wannabe1988
Participant
• CFA Level 1
0

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
Participant
• CFA Charterholder
3

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.