Chapter 10:Bonds Flashcards

1
Q

Bonds: General Characteristics

A

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
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2
Q

Interest is typically paid

A

semi-annually–based on the annual interest rate STATED on the bond document.

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3
Q

Stated Rate may be called

A

STATED = COUPON = FACE INTEREST = NOMINAL = CONTRACTURAL

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4
Q

Interest expense on the Income Statement reflects the

A

market interest rate

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5
Q

Market Interest Rate =

A

= Effective Interest Rate = Yield Rate

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6
Q

Interest expense is

A

tax deductible

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7
Q

Dividends declared

A

are NOT tax deductible for the issuer of stock.

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8
Q

Interest revenue (bonds) and dividend revenue (stocks) are

A

included in taxable income of creditor/investor.

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9
Q

If investor buys between interest date

A

then investor pays the market price of the bond plus interest accrued from last issuance date to date of purchase to the seller

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10
Q

Interest Payment Formula

A

IP= P x Sr x T

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11
Q

Premium

A

we ↑  NI by ↓ Interest Expense through the process of amortization

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12
Q

Discount

A

we ↓NI by ↑ Interest Expense through the process of amortization

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13
Q

Premium: Interest Expense

Discount : Interest Expense

A

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

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14
Q

Interest Expense (IE) is based

A

on the MR (market rate) of interest

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15
Q

Interest Paid (cash or interest payable)

A

is based on the SR (stated rate) of interest

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16
Q

New Financing Activities

A
  1. Issue Bonds (inflow of cash)

2. Repay principal at maturity date (outflow of cash).

17
Q

The increase and decrease statements about bonds

A

-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

18
Q

Proceeds

A

= issuance price = market price on issue date

19
Q

Face =

A

maturity value = principal

20
Q

Carrying value=

A

book value, net liability.

21
Q

Stated rate=

A

coupon rate, nominal rate, face interest rate, contractual rate

22
Q

Market rate=

A

yield rate, effective rate

23
Q

Cash paid is based on

A

stated rate at time of issuance: IP = P x SR x T.

24
Q

Interest expense on I/S

A

approximates the market rate of interest at time of issuance.

25
Two things that are the same on chart
- bonds payable recorded at | - cash paid
26
Proceeds vs Value (Chart)
see handout
27
Bonds payable at recorded at (chart)
see h....
28
carrying value (chart)
see h....
29
changes to book value(chart)
see h....
30
SR vs MR(chart)
see h....
31
Interest Expense(chart)
see h...
32
Cash Paid(chart)
see h.......
33
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.