F4 M4

Question 1

when a bond is issued at a premium

Answer 1

market rate < coupon (stated) interest rate

Question 2

when a bond is issued at a discount

Answer 2

market rate > coupon (stated) interest rate

Question 3

bond issuance costs

Answer 3

-reduce the carrying amt of the bond
-if bonds issued at a premium, bond issuance costs reduce premium amt
-if bonds issued at a discount, bond issuance costs added to discount amt

Question 4

calculation of bond discount/premium

Answer 4

1) face value of bond * market interest rate PV of $1 given
2) face value of bond * stated interest rate * market interest rate PV of $1 ordinary annuity (or annuity due)
3) add steps 1 and 2 for PV of bond
4) face value of bond - PV of bond = discount or premium

Note: if semiannual, quarterly, use that PV amt and make sure interest expense is reflective of semiannual etc.

Question 5

when warrants are detachable

Answer 5

-issue price of bonds and warrants should be allocated based on each component’s fair values on issuance date
-because warrants’ fair value is known, remainder of issuance price not allocated to warrants is allocated to bonds

Question 6

serial bonds

Answer 6

pre-numbered bonds that issuer may call and redeem portion by serial number
-mature in installments

Question 7

term bonds

Answer 7

single fixed maturity