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Basic Question 9 of 18
For the bond issuer, the annual interest expense associated with a bond issue will decline each year except for bond indentures with a(n) ______.
B. amortizing provision
C. sinking fund provision
A. bullet maturity
B. amortizing provision
C. sinking fund provision
User Contributed Comments 16
| User | Comment |
|---|---|
| morpheus918 | I don't get it. How does the interest expense decrease for the sinking fund? The bonds are not paid off early are they? |
| tony1973 | What's a sinking fund provisions? they are set forth in a bond's indenture to retire a specified portion of the bond each year to reduce credit risk. as the principals are reduced each year, the interest expense also decreases! |
| haarlemmer | My way as B & C are right, A has to be the answer. However, as I googled the definition of bullet marturity: no repayment of the principal until the maturity. |
| BADGUY | you are correct haarlemmer with the definition of bullet maturity-that's why A is the answer. |
| mtcfa | Interest expense will remain constant with a bullet bond; therefore A is the answer. |
| flemato347 | If the bullet bond were sold at a premium, wouldn't the answer be D? |
| akanimo | flemato347 the sale price of the bullet bond has NO IMPACT on ANNUAL INTEREST EXPENSE ... so (A) remains correct |
| MattNYC | Akanimo...that isn't true. If the bond was sold at a premium or a discount the interest expense is affected. Only at par does the interest expese = coupon payment. Recall, that with a premium bond int. expense falls over time as the premium is reduced and vice versa for a discount bond. |
| Donnaiola | MattNYC, that is wrong. The interest expense for the company doesnt change if the bond sells at premium/discount in the second hand market. The YIELD for the investor changes, but the interest expense for the company stays the same. Akanimo is right ! |
| slipleft | No No No. We seem to be confusing 2 concepts. The actual interest paid is the coupon payment; bullit bond will remain the same. However, MattNYC is correct for accounting purposes. The issuers balance sheet will carry the original issue price as a liability that will be increased (decreased) if the bond is sold at discount (premium). The recorded interest expense, on the books, will adjust the liability account to par as maturity nears; this annual adjustment will become smaller as the maturity nears. |
| michlam14 | question asks about declining interest expense. i just thought for A, through out it's lifetime there is no interest payment and in the very last year upon maturity, interest expense increasest to the full amount of difference between discounted price and principle. so A would be the answer? |
| johntan1979 | Thanks for the entertaining arguments, guys, but for me, I will instinctly pick A, because there isn't much to differentiate B and C in terms of their outcomes, but A is completely different. |
| rabihCH | somebody from AnalystNotes should moderate these answers and flag the wrong ones! Discussions are helpful, but wrong reasoning should be flagged. |
| Inaganti6 | @rabihCH there are way too many keyboard loose canons . Mods would need more than 24 hours in a day for that. |
| philerup | @johntan1979 with another asshole comment. |
| w12122333 | I chose A here. Because this is the only answer that doesn't make the principal of the bond diminish gradually, just pays off at maturity. Other two answers mean the principal should decrease from time to time, and hence generate less and less interest expense. |
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Learning Outcome Statements
describe common cash flow structures of fixed-income instruments
CFA® 2024 Level I Curriculum, Volume 4, Module 2.