Bonds Flashcards
Bond indenture
The document that describes the contract between the issuer (borrower) and bondholders (lenders)
Face (par) value
Face value is the total dollar amount of the bond and the basis on which periodic interest is paid. Bonds are issued at face (par) value when the stated rate of interest equals the market rate of interest.
Coupon = market
Stated (nominal or coupon) interest rate
Stated interest rate, also known as the nominal interest-rate or the coupon rate, is the interest to be paid to the investors in cash. This rate as specified in the bond contract
Market (effective) interest rate
The market interest rate is the rate of interest actually earned by the bondholder and is the rate of return for comparable contracts on the date the bonds are issued
Discount on bonds
if the market rate is higher than the stated rate,
Int exp is greater than coupon paid - added back to CV for amortization
bonds sell for less than the face amount to make up for the lower return being provided.
Loss.
( cash proceeds - face amount )
Carrying value is less than cash paid by the investor and less than the face amount of the bond
Premium on bonds
If the market rate is lower than the stated rate (or coupon rate)
Int exp is less than coupon paid - subtracted from CV for amortization
Gain
the investor will pay more than face value due to the higher return offered.
(Face amount - cash proceeds)
Will receive more than face value
Debentures
Unsecured bonds
Mortgage bonds
Bonds that are secured by real property
Collateral trust bonds
Secured bonds
Convertible bonds
Convertible into common stock of the debtor at the option of the bondholder
Nondetachable warrants
The convertible bond itself must be converted into capital stock
Bonds with Detachable warrants
The bond is not surrendered upon conversion, only the warrants plus cash representing the exercise price of the warrants. The warrants can be bought and sold separately from the bonds.
The proceeds from the issuance are allocated to 1) the fair value of the warrants without the debt (paid in capital account- equity) and 2) the fair value of the debt instrument (classify as debt).
Participating bonds
Bonds that not only have a stated rate of interest but participate in income if certain earnings levels are obtained.
Term bonds
Bonds that have a single fixed maturity date. The entire principle is paid at the end of this term/period.
Serial bonds
Pre-numbered bonds that the issue or may call and redeem a portion by serial number (often redeemed pro rata annually/in a series of annual installments).
