Chapter 10:Bonds Flashcards
Bonds: General Characteristics
Issued by companies only when large amounts of -money is needed to be raised for acquisition of long term assets.
- The corporation receives the cash at the original issuance
- Principal is repaid at maturity date whereas interest is paid semiannually or yearly.
- They have a long life (10 – 30 years)
- Principal = Face = Maturity value = PAR
Interest is typically paid
semi-annually–based on the annual interest rate STATED on the bond document.
Stated Rate may be called
STATED = COUPON = FACE INTEREST = NOMINAL = CONTRACTURAL
Interest expense on the Income Statement reflects the
market interest rate
Market Interest Rate =
= Effective Interest Rate = Yield Rate
Interest expense is
tax deductible
Dividends declared
are NOT tax deductible for the issuer of stock.
Interest revenue (bonds) and dividend revenue (stocks) are
included in taxable income of creditor/investor.
If investor buys between interest date
then investor pays the market price of the bond plus interest accrued from last issuance date to date of purchase to the seller
Interest Payment Formula
IP= P x Sr x T
Premium
we ↑ NI by ↓ Interest Expense through the process of amortization
Discount
we ↓NI by ↑ Interest Expense through the process of amortization
Premium: Interest Expense
Discount : Interest Expense
Premium: Interest Expense = Cash Paid for Interest MINUS
the amortization of the premium
Discount : Interest Expense = Cash Paid for Interest PLUS
the amortization of the discount
Interest Expense (IE) is based
on the MR (market rate) of interest
Interest Paid (cash or interest payable)
is based on the SR (stated rate) of interest
New Financing Activities
- Issue Bonds (inflow of cash)
2. Repay principal at maturity date (outflow of cash).
The increase and decrease statements about bonds
-By decreasing premium (through amortization) we will be adding a smaller and smaller number to the bonds payable (carrying value gets smaller).
-By decreasing discount account, we will be subtracting a
smaller and smaller number to bonds payable so carrying value gets larger and larger
Proceeds
= issuance price = market price on issue date
Face =
maturity value = principal
Carrying value=
book value, net liability.
Stated rate=
coupon rate, nominal rate, face interest rate, contractual rate
Market rate=
yield rate, effective rate
Cash paid is based on
stated rate at time of issuance: IP = P x SR x T.
Interest expense on I/S
approximates the market rate of interest at time of issuance.
Two things that are the same on chart
- bonds payable recorded at
- cash paid
Proceeds vs Value (Chart)
see handout
Bonds payable at recorded at (chart)
see h….
carrying value (chart)
see h….
changes to book value(chart)
see h….
SR vs MR(chart)
see h….
Interest Expense(chart)
see h…
Cash Paid(chart)
see h…….
Ch.10 question 16
Payroll deductions are recorded as liabilities. Gross earnings are recorded as salaries and wages expenses. Net pay is recorded as salaries and wages payable.
