Non Current Question - the hardest question

CFA Level I
#1

A company had the following events related to 10-year bonds with a par value of $5 million and a coupon rate of 8%, payable semiannually on 30 June and 31 December:

  • Issued on 1 January 2008, when the market rate of interest was 6%
  • Repurchased in an open market transaction on 1 January 2014, when the market rate of interest was 8%

The gain reported on the 2014 income statement from the bond repurchase will be closest to:

  1. $743,873.
  2. $350,984.
  3. $346,511.
#2

PV(remaining payments) @ 6% BEY - PV(remaining payments) @ 8% BEY

=(PV @ 6% BEY) - 5,000,000 (bond will trade at par since market rate = coupon rate)

= 5,350,984 - 5,000,000

= 350,984

There are far nastier questions out there… :smiling_imp: