FAR 11.01 - BOND TERMINOLOGY Flashcards
FAR 11.01 - BOND TERMINOLOGY
When debt is issued at a premium, interest expense over the term of debt equals the cash interest paid?
Minus premium minus par value
Plus premium
Minus premium
Plus premium plus par value
Minus premium
EXPLANATION:
Over the term of a bond, total interest expense will be equal to the excess of total amounts paid over the proceeds from issuance.
Payments will equal interest, calculated at the stated rate, plus the face amount of the bonds.
When bonds are issued at a discount, the amount received is less than the face amount and the difference increases interest expense over the bond term.
When bonds are issued at a premium, the amount received is greater than the face amount and the difference reduces interest expense over the bond term.
Cash 1100
B/P 1000
Prem 100
___________
Int Exp 60 (Cash Paid - Premium)
Prem. 20
Cash 80 (Cash Interest Paid)
FAR 11.01 - BOND TERMINOLOGY
What type of bonds mature in installments?
Debenture.
Serial.
Variable rate.
Term.
Serial.
EXPLANATION:
Bonds can be term bonds or serial bonds.
The face amount of term bonds is repaid in a lump sum at the end of the bond term.
The face amount of serial bonds is repaid in a series of periodic payments, which may or may not be equal in amount or interval.
As a result, serial bonds mature in installments.
FAR 11.01 - BOND TERMINOLOGY
Hancock Co.’s December 31, 20X3 balance sheet contained the following items in the long-term liabilities section:
Unsecured:
- 9.375% registered bonds ($25,000 maturing annually from 1/20X7) = $275,000
- 11.5% convertible bonds, callable beginning in 20X11, due 20X23 = $125,000
Secured:
- 9.875% guaranty security bonds, due 20X23 = $275,000
- 10.0% commodity backed bonds ($50,000 maturing annually beginning in 20X8)= $200,000
What are the total amounts of serial bonds and debenture bonds?
Serial bonds: $450,000
Debenture bonds: $400,000
Serial bonds: $475,000
Debenture bonds: $125,000
Serial bonds: $200,000
Debenture bonds: $650,000
Serial bonds: $475,000
Debenture bonds: $400,000
Serial bonds: $475,000
Debenture bonds: $400,000
EXPLANATION:
Serial bonds include those that require periodic principal payments, including the 9.375% unsecured registered bonds
of $275,000, and the 10.0% secured commodity backed bonds of $200,000 for a total of $475,000.
Debenture bonds are unsecured bonds, which includes the 9.375% registered bonds of $275,000 and the 11.5% convertible bonds of $125,000, for a total of $400,000.
