Bonds

Question 1

What are types of bonds?

Answer 1

• Serial bonds: are pre-numbered bonds that the issuer may call to redeem a portion by serial number.
• Term bonds: have a single fixed maturity date.
• Variable rate bonds: have interest rates that change.
• Debentures: unsecured corporate bonds.

Question 2

what is long term bond liability shown on the BS?

Answer 2

Bond liability is shown as net of unamortized discount on the BS. Also, the long term liabilities will increase by the difference between the carrying amount of the old bonds and the face amount (issuing price) of the new bonds.

Question 3

How to calculate bond issue price?

Answer 3

Bond issue price is the sum of PV of maturity value and the interest payment annuity.

Question 4

When will bonds sell at premium and discount?

Answer 4

• Bonds are sold at PREMIUM when contract (stated) interest rate is GREATER than market (effective/yield) interest rate. That means sell proceeds is greater than face value.
• Bonds are sold at DISCOUNT when contract (stated) interest rate is LOWER than market (effective/yield) interest rate. That means sell proceeds is lower than face value.

Question 5

What happens to carrying value compared to cash paid to seller and face value when purchased bonds at discount?

Answer 5

• Cash paid to seller (by investor): carry value will be less than cash paid to seller because it includes accrued interest.
• Face value: carrying value is less than the value of the bond because it was purchased at discount.

Question 6

what are the market value of bonds issued at discount (or premium) included?

Answer 6

• PV of principal amount
• PV of all future interest payments.
• Both of the above value are used market (effective/yield) interest rate.

Question 7

How to record bond issuance costs (all costs associated with issuance of bonds)?

Answer 7

Bond issuance costs are deducted from carrying value of bond liability and included in the debit entry to bond discount. The issuance costs should be amortized over the life of the bond using effective interest rate.

Question 8

what happens to bond carrying amount when sold at a discount vs. when sold at a premium?

Answer 8

• Carrying value of a bond liability on BS is face value plus unamortized premium or less amortized discount. Amortization causes the carrying amount to approach face value.
• Over time, the carrying value of bond sold at a discount will increase; whereas, the carrying value of bond sold at a premium will decrease.

Question 9

what is interest payable on a bond?

Answer 9

It equals face value at beginning of period times contract interest rate.

Question 10

what is interest expense on a bond?

Answer 10

It equals carrying value at beginning of period times effective interest rate.