Bond Accounting Principles Flashcards
What is a bond?
A financial debt instrument that typically calls for the payment of periodic interest, with the principal being due at some time in the future. The bondholder pays the issuing firm an amount based on the state and market rates of interest and receives interest and the face amount in return.
What is the Face (Maturity) value of a bond?
Amount paid to bondholder at maturity
What is the Stated (coupon) interest rate of a bond?
Rate at which the bond pays cash interest. Rate stated on the bond
What is the Market (yield, effective) interest rate of a bond?
The rate equating the sum of the present values of the cash interest annuity and the face value single payment, with the bond price.
When are bonds sold at a premium?
When stated rate > market rate.
Define “maturity date.”
The date the maturity value is paid, the end of the bond term
Define “bond date.”
The first possible issuance date
What method is required for bond premium/discount amortization?
Effective interest method
Define “secured bonds.”
Bonds that have a claim to specific assets
Define “serial bonds.”
Bonds that mature at regular or staggered intervals. The principal is paid gradually rather than all at once
When are bonds sold at a discount?
When stated rate
Describe three general aspects about the valuation of all long-term liabilities
- ) Initially recorded at the present value of future cash flows;
- )Interest and amortization are recognized at the market interest rate the date the liability was established;
- )Interest expense equals the liability balance at the beginning of the period times the market rate of interest the date the liability was recorded.
What is the effective interest method?
Computes interest expense based on the beginning book value of the bond and the market rate at issuance.The difference between interest expense and cash paid is the amortization of the discount or premium and is a “plug” Interest expense based on discounted price (Discounted price paid x interest rate)
When effective interest method is used for bonds issued at a premium, how is the amount of interest payable calculated?
By multiplying the FV of the bonds at the beginning of the period by the contractual interest rate
