Bonds

Question 1

How to calculate interest expense on IS

Answer 1

Carrying value (beg) x market rate (at issuance)

Interest expense for each period will increase with the increase in carrying value and vice versa

Face value, coupon rate, and coupon payment will not change over life of bond

Question 2

Coupon payment

Answer 2

Face value x coupon

Question 3

How is interest and money principal paid in bonds?

Answer 3

Interest paid periodically (usually semi-annually), principal is paid at full face value at maturity

Question 4

Premium and Discount

Answer 4

-adjusting coupon rate to prevailing market rate
-premium represents DEFERRED unrecorded gain that causes interest expense on the IS to be less than the coupon paid
-discount is the opposite of premium

Question 5

Par value

Answer 5

Selling price equals face value

If discount- selling price is less than par value
If premium- selling price is greater than par value

Question 6

Bond selling price

Answer 6

PV of future principal payment + PV of future periodic interest payments

Question 7

Present Value Factors

Answer 7

-# of periods
-market rate (NOT coupon rate) / # of periods
-only use coupon rate to determine coupon payment (face value x coupon rate)