Question on CFF and CFO for zero coupon bond

aroranidhi2004
Finance Junkie
Posts: 41
Joined: Thu Oct 16, 2014 4:51 pm

Question on CFF and CFO for zero coupon bond

Postby aroranidhi2004 » Thu Oct 16, 2014 4:54 pm

Why proceeding in the question below are in CFF and not in CFO


Nomad Company issued $1,000,000 face value 2-year zero coupon bonds on December 31, 20X2 to yield 8% interest. Bond proceeds were $857,339. In 20X3 Nomad recorded interest expense of $68,587. In 20X4 Nomad recorded interest expense of $74,074 and paid out $1,000,000 to redeem the bonds. Based on these transactions only, Nomad’s Statement of Cash Flows would show cash flow from operations (CFO) of:

A) -$68,587 in 20X3 and -$74,074 in 20X4.

B) zero in all years.

C) -$142,661 in 20X4.

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Question on CFF and CFO for zero coupon bond

Postby edupristine » Fri Oct 17, 2014 4:29 am

Hello aroranidhi2004

Please note that Nomad company has issued zero coupon bonds. All the cash flows from zero coupon bonds are recorded in cash flow from financing activities and not cash flow from operating activities.

Hence, CFO would be zero in all years. Hence, the answer is option (B).


Return to “FRM Part II”



Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.