Bonds & Debt Restructuring Flashcards
What is a refunding bond?
Reacquisition of debt securities by the use of proceeds from issuing other securities
How do you calculate the purchase price of a bond?
- face value discounted at PV of single sum at market rate
- plus
- Interest payments at stated rate, discounted at PV of annuity at market rate
So discount face value, then discount payments. Discount at market rate.
What happens to premium or disount over time?
- Premium starts higher than FV, reduces over time.
- Interest reduces over time as CV dwindles
- Starts as a credit - same direction as bond
- Discount starts lower than FV, increases over time.
- Interest increases over time as balance grows
- Starts as debit - offset the bond payable and gets closer to FV over time
What is the difference between the book value method and market value method for convertible bonds?
- Book value method: Issuance price of stock= carrying value of bonds No gain or loss
- Market value method: Issue price of stock = Fair Value Gain or loss recognized
How do you calculate the interest expense on bonds ?
This is NOT the same as Interest Paid.
Interest exp = CV at the beginning of the period x effective (market) interest rate
How to you calculate Interest Expense using the Effective Interest Rate Method ?
CV at the beginning of the period x effective interest rate
Entry for holder:
DR Cash at coupon (face value x stated)
DR Discount amort or CR Premium amort(difference)
CR Interest Income ( CV x effective interest)
What happens to bond interest expense with a premium discount over time?
From Borrower’s perspective:
Premium is good news, interest expense goes down over time
Discount is bad news, interest expense goes up over time. Issuance costs works like extra discount
What is the FVO as applied to Bonds
Fair Value Option is irrevocable decision at the time of issuance and is applied on a debt instrument level. Book Value of Bond is adjusted to Fair Value adjustment account and records unrealized gain or loss in earnings. This treatment is less of a free choice under IFRS, but evaluated on a group of instruments as a part of risk management strategy. (FVTPL = Fair Value Through Profit and Loss)
What are debenture bonds?
Unsecured bonds.
Think of a wild bender (debenture), no guarantee of return.
Opposite is secured bonds - tied to specific capital.
What are callable bonds?
May be retired at the issuer’s option
What determines if a bond is sold at a premium or discount?
- Stated rate more than market - bonds will sell at a premium. Return is better than market, people are willing to pay extra.
- Stated less than market, bonds will sell at a discount. Return is less than market, have to use low price to attract buyers.
How are bond issue costs treated at issuance?
- legal fees, accounting fees, underwriting fees.
- Treated like additional discount and amortized over time using effective interest rate.
What is bond extinguishment vs. refunding?
- Extinguishment - Reacquistion of debt securities regardless of whether the securities are cancelled or held as so called treasury bonds
- Refunding - issuer has used proceeds from issuing other securties and is able to pay off debt (bond)
How do you record retirement of a bond ?
Find out the current value of premium or discount
Debit bonds payable
Credit cash paid to retire
Plug the difference to gain or loss
What are the differences between convertible bonds recorded under the book value method or market value method?
- Book value - recorded at book value of bond,
- no gain or loss,
- difference is plugged to APIC
- Market value - compare market value of stocks or bonds
- gain or loss recorded on value over/under stocks
- APIC is recorded for value of stock
