Notes & Bonds

Question 1

Ordinary Annuity

Answer 1

At the end of a period

Question 2

Annuity Due

Answer 2

At the beginning of period

Question 3

Carrying value of bond issued at a discount

Answer 3

Unamortized bond discount is deducted from the bond’s face value.

Question 4

When is a bond considered issued at a discount?

Answer 4

When the bond’s stated rate is less than the market rate

Question 5

Bond discount amortization

Answer 5

Bond discount amortization = interest exp (CV x effective interest rate (yield/market)) - cash interest pymnt (Face value x stated rate)

Question 6

Determine carrying value of a bond issued at a discount

Answer 6

Discount amortization is added to CV each period.

Annual bond discount amort = Interest exp (CV x effective int rate) - Cash interest paid (face value x stated coupon rate)

Question 7

Detachable stock warrants issued with bonds

Answer 7

When detachable stock warrants are issued with bonds the sales proceeds must be allocated between the warrants & the bonds based on relative fair value. If only 1 fair value is known that amount is allocated first & the remainder assigned to the other

Question 8

Determine carrying value(CV) for bond issued at a premium

Answer 8

CV for bond issued at a premium = the bond’s face value + unamortized bond premium - unamortized bond issue costs

Question 9

Bond premium amortization

Answer 9

Face Value + Premium = CV x Effective Interest Rate (yield/market) = Interest Exp - Interest Pymt (Face Value x Stated Interest Rate = Amort of Premium

Question 10

What are the bonds types?

Answer 10

Term bonds with a single maturity date at the end of the bond term

Serial bonds have multiple mature dates at regular intervals throughout their lives

Debenture bonds are unsecured by collateral & backed by issuers credit

Collateralized bonds are secured by assets i.e. commodity backed bonds