*US CMA Part 1: Bond Valuation & Amortization – Case-Based MCQs*
Section A
1.
A bond issued at a price above its face value is issued at:
A. Discount
B. Par
C. Premium
D. Zero value
Answer:
2.
When market interest rate is lower than coupon rate, bonds are issued at:
A. Discount
B. Premium
C. Par
D. Loss
Answer:
3.
Bond discount occurs when:
A. Coupon rate = Market rate
B. Coupon rate > Market rate
C. Coupon rate < Market rate
D. Interest is unpaid
Answer:
4.
The carrying value of a bond issued at discount will:
A. Decrease over time
B. Increase over time
C. Remain constant
D. Become zero
Answer:
5.
The carrying value of a bond issued at premium will:
A. Increase over time
B. Decrease over time
C. Stay constant
D. Become negative
Answer:
6.
Which method is preferred under US GAAP for amortization?
A. Straight-line
B. Effective interest method
C. Declining balance
D. FIFO method
Answer:
7.
Interest expense under effective interest method equals:
A. Coupon payment
B. Face value × coupon rate
C. Carrying value × market rate
D. Market value × coupon rate
Answer:
8.
Bond interest payment is calculated on:
A. Carrying value
B. Market value
C. Face value
D. Discount value
Answer:
9.
If bonds are issued at discount, interest expense is:
A. Less than cash paid
B. Equal to cash paid
C. Greater than cash paid
D. Zero
Answer:
10.
If bonds are issued at premium, interest expense is:
A. Greater than cash paid
B. Less than cash paid
C. Equal to cash paid
D. Double the cash paid
Answer:
11.
Amortization of bond discount:
A. Reduces interest expense
B. Increases interest expense
C. Has no effect
D. Eliminates liability
Answer:
12.
Amortization of bond premium:
A. Increases interest expense
B. Reduces interest expense
C. No impact
D. Eliminates cash flow
Answer:
13.
At maturity, carrying value of bond equals:
A. Market value
B. Issue price
C. Face value
D. Discount value
Answer:
14.
Which component is NOT part of bond valuation?
A. Present value of principal
B. Present value of interest
C. Future market speculation
D. Discount rate
Answer:
15.
Bond price equals:
A. FV + interest
B. PV of principal only
C. PV of interest + PV of principal
D. Coupon × years
Answer:
16.
Effective interest method results in:
A. Constant amortization amount
B. Variable amortization amount
C. Zero amortization
D. Fixed interest expense
Answer:
17.
Straight-line method results in:
A. Variable interest expense
B. Constant amortization
C. Increasing carrying value always
D. No amortization
Answer:
18.
Discount on bonds payable is classified as:
A. Asset
B. Liability
C. Contra liability
D. Revenue
Answer:
19.
Premium on bonds payable is classified as:
A. Asset
B. Liability addition
C. Contra liability
D. Expense
Answer:
20.
If market rate equals coupon rate, bond is issued at:
A. Premium
B. Discount
C. Par
D. Loss
Answer:
Section b: External Financial Reporting | Subtopic: Bonds Payable, Effective Interest Method ASC 835
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*Case 1: Bond Issued at Discount – Interest Expense*
*Case*: On 1/1/2026, GMSIsuccess LLP issues 5-year, 8% bonds with face value ₹10,00,000. Interest payable semiannually 6/30 and 12/31. Market rate = 10%. Proceeds = ₹9,22,780.
*Q1*: What is the interest expense for 6/30/2026 using effective interest method?
A. ₹40,000
B. *₹46,139*
C. ₹50,000
D. ₹36,911
*Answer:
*Q2*: Bond carrying value at 12/31/2026 after 2 payments?
A. ₹9,22,780
B. ₹9,28,919
C. *₹9,35,365*
D. ₹10,00,000
*Answer:
*Case 2: Bond Issued at Premium – Amortization*
*Case*: 1/1/2026, 5-year, 10% bonds, Face ₹10,00,000. Market rate 8%. Proceeds = ₹10,81,110. Semiannual interest.
*Q3*: Interest expense for 6/30/2026?
A. ₹50,000
B. *₹43,244*
C. ₹40,000
D. ₹54,056
*Answer:
*Q4*: Bond carrying value at 12/31/2026?
A. ₹10,81,110
B. ₹10,74,354
C. *₹10,67,327*
D. ₹10,00,000
*Answer:
*Case 3: Straight-Line vs Effective Interest – CMA Trap*
*Case*: 3-year, 9% bonds, Face ₹5,00,000, issued at ₹4,71,697 when market = 11%. Straight-line method used for amortization.
*Q5*: Interest expense for Year 1 using SL method?
A. ₹45,000
B. *₹54,434*
C. ₹51,887
D. ₹55,000
*Answer:
*Q6*: Under US GAAP, which method must be used?
A. Straight-line
B. *Effective interest method*
C. Either, if immaterial difference
D. Market value method
*Answer:
---
*Case 4: Bond Retirement Before Maturity*
*Case*: On 1/1/2028, after 2 years, GMSIsuccess retires the 10% premium bonds from Case 2. Carrying value 1/1/2028 = ₹10,52,296. Retired at 102 = ₹10,20,000.
*Q7*: Gain or loss on retirement?
A. Loss ₹32,296
B. *Gain ₹32,296*
C. Loss ₹20,000
D. No gain/loss
*Answer:
---
*Case 5: Zero-Coupon Bond – Deep Discount*
*Case*: 5-year zero-coupon bond, Face ₹10,00,000, issued for ₹6,20,920 when market = 10%.
*Q8*: Interest expense Year 1?
A. ₹0
B. ₹100,000
C. *₹62,092*
D. ₹75,816
*Answer:
---
*Case 6: Bond Issue Costs – US GAAP*
*Case*: Issued ₹10,00,000 bonds at par. Paid ₹20,000 bond issue costs.
*Q9*: How are issue costs reported under US GAAP?
A. Expense immediately
B. *Record as direct deduction from bond liability, amortize using effective interest*
C. Record as asset, amortize SL
D. Add to premium
*Answer:
*Q10*: If issued at par with ₹20k costs, initial net liability = ?
A. ₹10,00,000
B. *₹9,80,000*
C. ₹10,20,000
D. ₹9,90,000
*Answer:
---
*Key CMA Trigger Points for Bonds*
Trigger Word Means Impact on Interest Expense Carrying Value Trend
**Market > Stated** Discount Interest Exp > Cash Paid BV increases to Face
**Market < Stated** Premium Interest Exp < Cash Paid BV decreases to Face
**Effective Interest** Exp = BV × market rate Not constant Changes each period
**Straight-Line** Amort = Total Disc/Periods Constant + Cash CMA distractor – GAAP needs effective
**Retire > BV** Loss Dr. Loss BV < Cash paid
**Retire < BV** Gain Cr. Gain BV > Cash paid
**Zero-Coupon** All discount, no cash Exp = BV × rate BV grows fast
**Issue Costs** Contra-liability Increases effective rate Reduces initial BV
*CMA Exam Tip*: 80% of bond Qs use _semiannual_ payments. Always divide rates by 2. If they give annual market 10%, use 5% per period.
ANSWERS: Section b
*Case 1: Bond Issued at Discount – Interest Expense*
*Case*: On 1/1/2026, GMSIsuccess LLP issues 5-year, 8% bonds with face value ₹10,00,000. Interest payable semiannually 6/30 and 12/31. Market rate = 10%. Proceeds = ₹9,22,780.
*Q1*: What is the interest expense for 6/30/2026 using effective interest method?
A. ₹40,000
B. *₹46,139*
C. ₹50,000
D. ₹36,911
*Answer: B*
*Why*: Issued at discount because market 10% > stated 8%.
Book value 1/1 = ₹9,22,780.
Effective rate per period = 10%/2 = 5%.
Interest expense = 9,22,780 × 5% = *₹46,139*.
Cash paid = 10,00,000 × 8%/2 = ₹40,000. Discount amortized = 6,139.
*Q2*: Bond carrying value at 12/31/2026 after 2 payments?
A. ₹9,22,780
B. ₹9,28,919
C. *₹9,35,365*
D. ₹10,00,000
*Answer: C*
*Why*: 6/30: BV = 9,22,780 + 6,139 = 9,28,919.
12/31: Interest exp = 9,28,919 × 5% = 46,446. Cash = 40,000. Amort = 6,446.
New BV = 9,28,919 + 6,446 = *₹9,35,365*. Discount decreases, BV increases to face.
---
*Case 2: Bond Issued at Premium – Amortization*
*Case*: 1/1/2026, 5-year, 10% bonds, Face ₹10,00,000. Market rate 8%. Proceeds = ₹10,81,110. Semiannual interest.
*Q3*: Interest expense for 6/30/2026?
A. ₹50,000
B. *₹43,244*
C. ₹40,000
D. ₹54,056
*Answer: B*
*Why*: Premium because market 8% < stated 10%.
Effective rate = 8%/2 = 4%.
Interest exp = 10,81,110 × 4% = *₹43,244*.
Cash paid = 10,00,000 × 10%/2 = ₹50,000. Premium amortized = 6,756.
*Q4*: Bond carrying value at 12/31/2026?
A. ₹10,81,110
B. ₹10,74,354
C. *₹10,67,327*
D. ₹10,00,000
*Answer: C*
*Why*: 6/30: BV = 10,81,110 – 6,756 = 10,74,354.
12/31: Interest exp = 10,74,354 × 4% = 42,974. Cash = 50,000. Amort = 7,026.
New BV = 10,74,354 – 7,026 = *₹10,67,327*. Premium decreases, BV decreases to face.
---
*Case 3: Straight-Line vs Effective Interest – CMA Trap*
*Case*: 3-year, 9% bonds, Face ₹5,00,000, issued at ₹4,71,697 when market = 11%. Straight-line method used for amortization.
*Q5*: Interest expense for Year 1 using SL method?
A. ₹45,000
B. *₹54,434*
C. ₹51,887
D. ₹55,000
*Answer: B*
*Why*: SL amortization = Total discount / periods. Discount = 500,000 – 471,697 = 28,303. 3 yrs = 28,303/3 = 9,434 per year.
Cash interest = 500,000 × 9% = 45,000.
SL Interest expense = 45,000 + 9,434 = *₹54,434*.
Note: US GAAP requires effective interest for bonds, but CMA tests SL vs Effective concept.
*Q6*: Under US GAAP, which method must be used?
A. Straight-line
B. *Effective interest method*
C. Either, if immaterial difference
D. Market value method
*Answer: B*
*Why*: ASC 835-30: Effective interest required. SL allowed only if result not materially different.
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*Case 4: Bond Retirement Before Maturity*
*Case*: On 1/1/2028, after 2 years, GMSIsuccess retires the 10% premium bonds from Case 2. Carrying value 1/1/2028 = ₹10,52,296. Retired at 102 = ₹10,20,000.
*Q7*: Gain or loss on retirement?
A. Loss ₹32,296
B. *Gain ₹32,296*
C. Loss ₹20,000
D. No gain/loss
*Answer: B*
*Why*: BV 10,52,296 > Cash paid 10,20,000 → *Gain ₹32,296*.
Entry: Dr. Bonds Payable 10,00,000, Dr. Premium 52,296, Cr. Cash 10,20,000, Cr. Gain 32,296.
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*Case 5: Zero-Coupon Bond – Deep Discount*
*Case*: 5-year zero-coupon bond, Face ₹10,00,000, issued for ₹6,20,920 when market = 10%.
*Q8*: Interest expense Year 1?
A. ₹0
B. ₹100,000
C. *₹62,092*
D. ₹75,816
*Answer: C*
*Why*: Zero-coupon = all discount. No cash interest.
Effective rate 10%. Year 1 exp = 6,20,920 × 10% = *₹62,092*. All added to BV.
BV end Year 1 = 6,20,920 + 62,092 = 6,83,012.
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*Case 6: Bond Issue Costs – US GAAP*
*Case*: Issued ₹10,00,000 bonds at par. Paid ₹20,000 bond issue costs.
*Q9*: How are issue costs reported under US GAAP?
A. Expense immediately
B. *Record as direct deduction from bond liability, amortize using effective interest*
C. Record as asset, amortize SL
D. Add to premium
*Answer: B*
*Why*: ASC 835-30: Issue costs = contra-liability. Net the bond proceeds. Amortize via effective interest. Not separate asset post-2015 ASU.
*Q10*: If issued at par with ₹20k costs, initial net liability = ?
A. ₹10,00,000
B. *₹9,80,000*
C. ₹10,20,000
D. ₹9,90,000
*Answer: B*
*Why*: Cash 9,80,000 = Dr. Cash 9,80,000, Dr. Discount on BP 20,000, Cr. Bonds Payable 10,00,000. Net BV = 9,80,000.
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*Key CMA Trigger Points for Bonds*
Trigger Word Means Impact on Interest Expense Carrying Value Trend
**Market > Stated** Discount Interest Exp > Cash Paid BV increases to Face
**Market < Stated** Premium Interest Exp < Cash Paid BV decreases to Face
**Effective Interest** Exp = BV × market rate Not constant Changes each period
**Straight-Line** Amort = Total Disc/Periods Constant + Cash CMA distractor – GAAP needs effective
**Retire > BV** Loss Dr. Loss BV < Cash paid
**Retire < BV** Gain Cr. Gain BV > Cash paid
**Zero-Coupon** All discount, no cash Exp = BV × rate BV grows fast
**Issue Costs** Contra-liability Increases effective rate Reduces initial BV
*CMA Exam Tip*: 80% of bond Qs use _semiannual_ payments. Always divide rates by 2. If they give annual market 10%, use 5% per period.
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