Bond basics

Question 1

I need money so I will

Answer 1

SELL a bond

Question 2

Investor

Answer 2

lender, buyer, bondholder

Question 3

Issuer

Answer 3

Borrower of money, seller

Question 4

Bondholder

Answer 4

Lender, buyer of the bond

Question 5

Bond discounts have what normal balance?

Answer 5

debit (because it is a contra-liability account

Question 6

Calculating periodic cash payment

Answer 6

Face amt of bond x face rate (coupon) x fraction of the year

Question 7

Formula to compute bond periodic interest expense

Answer 7

Book value (carry value) x Market rate x Fraction of year = interest expense

Question 8

When there is a discount or premium, what is due on maturity date

Answer 8

FACE AMOUNT NO MATTER WHAT

Question 9

When amortizing a bond, what should the final amortized amount be?

Answer 9

face value

Question 10

Bond underwriter

Answer 10

a company who plans to buy a lot of bonds in order to resell them for a profit

Question 11

Premium

Answer 11

the amount that LENDERS pay for a bond in excess of face amount

Question 12

Discount

Answer 12

amount that LENDERS pay that is less than face

Question 13

Diff between market and face rate

Answer 13

market is the rate that lenders can immediately get for their money

Face rate– percentage written on the face of a bond to calculate cash payment

Question 14

Convertible bonds

Answer 14

bonds that have the option to be converted into stock

Question 15

Zero-coupon bonds

Answer 15

pays no interest, but has a deep “discount” so interest is already factored in like a non-interest bearing note.

Question 16

Ways to report liabilities

Answer 16

1. Amortized cost
2. Fair Value

Note: you can mix and match, BUT must decide at the beginning of the liability because you can’t switch between the tow.

Question 17

How can you tell if a bond is sold at a premium or discount

Answer 17

look to see if the effective and stated interest rates differ, if stated (coupon into rate is higher than market its a premium), if lower than effect (or market) it is a discount

Question 18

Find the premium or discount amount

Answer 18

Find present value

Where interest is the market/2
N is the number of periods (years/2)
Payment is coupon x face x frac of year
Future value is face/par

Question 19

Another name for face of bond
Another name for coupon rate
Another name for market rate
Another name for carry value

Answer 19

1 face= par

2. coupon=bond rate=stated interest=face rate
3. Market rate=effective interest
4. Carry value= book value= outstanding balance

Question 20

call price on a bond is…

Answer 20

the amount that must be paid in the event of early extinguishment of debt