FAR 5 - M4 BONDS

Question 1

Bond issuance is selling a bond
It can be issued at a discount or premium

Bond issuance cost are professional fees and registration fees, all costs associated with issuance
BIC are amortized over the “OUTSTANDING” term of the bonds

Bond payable is net of BIC and discounts

Answer 1

EX:

Cash           955000
Discount       10000
BIC                35000
Bond payable         1000000
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Cash           970000
BIC                  35000                   
Bond payable             1000000
Premium on bond          5000     

**** OFFSET BIC AND PREMIUM

Cash 970000
BIC 30000
Bond Payable 1000000

Question 2

Check the stated/contract interest rate VS Market interest rate

Answer 2

Stated or contract interest rate = 10%
Market interest rate - 8%
**Bond was issued at a PREMIUM (sold @10% when mkt is only @8%)

MKT RATE will be the discount rate to use to calculate the PV of the principal + PV of interest payments

EX: 
1/1  Y1  $800000 10% bonds 1/1/ Y1
            interest paid semi annually 6/30 and 12/31
            matures in 5 yrs
            mkt rate = 8%
            Find sales proceeds

Given: PV of ord anuuity PV of $1

N=10;i=.04 8.11090 .67556
N=10;i=.05 7.72173 .61391

Principal:
(Since mkt rate is 8% paid semiannual = 4% disc rate to use)
$800000 * .67556 = 540448

Interest:
$800000 * 10% = 80000 /2 = 40000
$40000 * 8.11090 = 324436

Sales proceeds: 540448 + 324436 = 864884

Question 3

Bond issued with detachable warrant

Answer 3

Convertible bond

Question 4

How do you calculate:

interest payable and interest expense

Answer 4

Face value x contract/stated interest rate = interest PAYABLE or cash paid

CV, beg of period x effective/Mkt interest rate = interest EXPENSE