Bond basics Flashcards
I need money so I will
SELL a bond
Investor
lender, buyer, bondholder
Issuer
Borrower of money, seller
Bondholder
Lender, buyer of the bond
Bond discounts have what normal balance?
debit (because it is a contra-liability account
Calculating periodic cash payment
Face amt of bond x face rate (coupon) x fraction of the year
Formula to compute bond periodic interest expense
Book value (carry value) x Market rate x Fraction of year = interest expense
When there is a discount or premium, what is due on maturity date
FACE AMOUNT NO MATTER WHAT
When amortizing a bond, what should the final amortized amount be?
face value
Bond underwriter
a company who plans to buy a lot of bonds in order to resell them for a profit
Premium
the amount that LENDERS pay for a bond in excess of face amount
Discount
amount that LENDERS pay that is less than face
Diff between market and face rate
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
Convertible bonds
bonds that have the option to be converted into stock
Zero-coupon bonds
pays no interest, but has a deep “discount” so interest is already factored in like a non-interest bearing note.
Ways to report liabilities
- Amortized cost
- 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.
How can you tell if a bond is sold at a premium or discount
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
Find the premium or discount amount
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
Another name for face of bond
Another name for coupon rate
Another name for market rate
Another name for carry value
1 face= par
- coupon=bond rate=stated interest=face rate
- Market rate=effective interest
- Carry value= book value= outstanding balance
call price on a bond is…
the amount that must be paid in the event of early extinguishment of debt
