Bond Accounting Principles

Question 1

Need to know:

Answer 1

• Terminology
  How to value a bond
• Calculation of a premium and discount
• Interest Expense

Question 2

What is bond?

Answer 2

Contract to repay borrowing at a specified maturity; interest to be paid a specific intervals until maturity

Question 3

what is the nominal rate?

Answer 3

Rate that is stated on the bond (used to calculate interest)

Question 4

The market rate, effective rate, yield rate:

Answer 4

Rate that the bond is earning, used to calculate present value of the bond and interest expense

Question 5

What is indenture

Answer 5

A legal contract representing debt

Question 6

What is a debenture

Answer 6

Unsecured bond

Question 7

What is a sinking fund

Answer 7

Funds set aside, typically with a trustee, to retire bonds

Question 8

What is a discount?

Answer 8

Bond is sold for less than the face value; effective rate is greater than the stated rate

Question 9

What is a premium?

Answer 9

Bond is sold more than the face value; stated rate is greater than the effective rate

Question 10

What is the face value?

Answer 10

par value, principle, or par value

Question 11

What are the types of bond?

Answer 11

Term bond- interest payment are made periodically, the face is paid on the maturity

Serial bond- Structured bonds mature at points

Convertible bond- right to convert bond into share of stock

Zero-Coupon bond- no periodic payments, no interest paid. Usually sold at a discount.

Mortgage bond- Secured with real estate

Junk bond- unsecured with a high-risk bond