SS9 R32 Non-Current Liabilities

Question 1

bond

Answer 1

contractual promise between borrower (issuer) and lender (bondholder)

Question 2

face value

Answer 2

aka maturity value or par value

amount of principal to be paid to lender at maturity

used to calculate coupon payments

Question 3

coupon payments

Answer 3

periodic interest payments to bondholder

calculated by multiplying face value by coupon rate

Question 4

effective rate of interest

Answer 4

interest rate that equates the PV of future CFs of the bond and the issue price

market rate of interest required by bondholders

depends on bond’s risks (default risk, liquidity risk, etc.), structure of interest rates, and timing of CFs

likely to change over the bond’s life, changing the bond’s market value as well

Question 5

coupon rate

Answer 5

interest rate stated in the bond used to calculate coupon payments

Question 6

balance sheet liability

Answer 6

PV of a bond’s remaining CFs (coupon payments and face value), discounted at the market rate of interest AT ISSUANCE

at maturity, the liability equals the face value of the bond

aka. book value or carrying value of the bond

Question 7

interest expense

Answer 7

reported on I/S

calculated by multiplying the book value of the bond liability at the beginning of the period by the market rate of the interest of the bond when it was issued

Question 8

par, discount, and premium bond

Answer 8

par: bond priced at face value; market rate equal to coupon rate
discount: market rate greater than coupon rate; priced below par
premium: market rate less than coupon rate; priced above par

Question 9

effective interest rate method

Answer 9

interest expense is equal to the book value of the bond liability (at the beginning of the period) multiplied by the bond’s yield at issuance

required under IFRS
preferred under US GAAP (can also use straight-line method)

Question 10

zero-coupon bond

Answer 10

has no periodic interest payments
it is issued at a discount from its par value and its annual interest expense is implied, but only paid out at maturity

aka. pure-discount bond

Question 11

issuance costs

Answer 11

IFRS
initial bond liability on B/S is reduced by the amount of the cost (increasing the bond’s effective interest rate)
treated as unamortized discount

under both US GAAP and IFRS, issuance costs are typically netted against the bond proceeds and reported on the CF statement as a financing CF