Bonds Chapter 13 from Financial Accounting. Bonds A form of interest bearing note Requires...
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Transcript of Bonds Chapter 13 from Financial Accounting. Bonds A form of interest bearing note Requires...
Bonds
A form of interest bearing note Requires periodic interest payments The face amount must be repaid at the
maturity date Bondholders are creditors of the issuing
corporation
Present Value & Bonds
Price that buyers are willing to pay for the bonds dependent upon The face amount of the bonds Periodic interest to be paid Market rate of interest
Interest
Coupon rate – Rate of interest stated
on the bonds
Market or effective rate Interest determined by
market conditions
Interest rates
If the Market rate = coupon rate
BONDS sells at FACE If the market rate >
Coupon rate BONDS sells BELOW Face DISCOUNT
If the market rate < coupon rate
BONDS sells ABOVE face PREMIUM
Bonds at Discount
Steps: Compute the PV of the face amount Computer the PV of the interest payments Add the amounts in the first two steps Face amount – selling price = discount
Bonds at Discount
Entry: Cash DR Discount DR
Bonds payable CR
Example: Corp sells $100,000 of 5 years bonds with a coupon rate of interest of 12% and market rate of interest of 13%. Interest is $6,000 is paid semiannually.
Example 3:
Selling Price of Bonds
PV of FACE ( 100,000, r = 13%/2, p = 5 X 2)
$100,000 X .53273 = $53,273
PV of Interest pay ($6,000, r = 6.5%, p =10)
$6,000 X 7.1883 = 43,130
Selling price of bonds 96,403
Example 3
Face value $100,000
Selling price 96,403
Discount 3,597
ENTRY:
Cash 96,403
Discount 3,597
Bonds payable 100,000
Example 4:
PV( $200,000, r 11%/2, p = 10)
$200,000 X .58543 = $117,086
PV ( $10,000, r 11%/2, p=10)
$10,000 X 7.53763 = 75,376
Selling price 192,462
Face 200,000
Discount 7,538
Amortization of Bond Discount
Two methods Straight line method
Discount amortized = Discount/# of interest payments Effective interest method
Bonds issued at Premium
Same as discount Face amount – selling price = premium Entry:
Cash DR
Bonds payable CR
Premium CR
Example 3
Corporation sells $100,000 of 5 year bond with a coupon rate of interest of 12% and market rate of interest of 11%. Interest of $6,000 is paid semiannually.
Example 3
PV ( $100,000, r=11%/2, p =10)
$100,000 X .58543 = $58,543
PV($6,000, r=11%/2, p=10)
$6,000 X 7.53763 = 45,226
Selling price 103,769
Face 100,000
Premium 3,769
Example 4
PV( $200,000, p=10, r =5%) $200,000 * .61391 = $122,782 PV($11,000, p =10, r=%) $11,000 * 7.72174 = 89,939 Selling price 207,721 Face 200,000 Premium 7,721
Premium Amortization
Straight line method Amortized = Premium/# of interest payment Example 5:
Amortized = 3594/10 = $360 Interest exp 5640Premium 360 Cash 6,000