Bonds

Question 1

Bond Indenture agreement contains:

Answer 1

1. Stated rate or coupon rate
2. Whether the bonds are callable or can be retired early
3. Sinking fund requirements
4. Dates of the interest payments (ex semi annual)

Question 2

Sinking fund

Answer 2

Restricted cash account to guarantee that there will be enough funds to repay the bonds

Question 3

Market rate

Answer 3

1 Not known until the day the bonds are issued so the bond proceeds are also not known until the day of issue
2 Also is based on the bond rating
3 determines the selling rate of the bond

Question 4

The market rate is compared to the stated (coupon) rate to determine discount or premium

Answer 4

Coupon rate 10 and market is 9 then it is a bond premium …. You have to pay more than face for this bond

Coupon rate is 10 and market is 11 then it is a bond discount

Question 5

If the stated (coupon) rate is 5

The market rate is 6

Answer 5

Bond are sold at a discount

Question 6

If the started rate (coupon rate) is 10

Market rate is 9

Answer 6

Bond is sold at a premium

Question 7

$1,000 bonds issued at 97

Answer 7

Means 1,000 bonds issued at 970 which is a discount - this is below face value
1,000 would be par

Question 8

Bond JV

Answer 8

D cash
C bond payable for whatever the face amount of the bonds is

You enter a debit or credit to balance the cash with either a debit to bond discount or a credit to bond premium

Question 9

Bonds sold at a discount

Answer 9

Investor (buyer) benefits

Coupon rate lower than market rate

Question 10

Bonds sold at a premium

Answer 10

Seller of the bonds benefits

Coupon rate higher than market rate

Question 11

Present value tables are built on periods

Answer 11

5 years, interest semi annual …. 10 periods

Question 12

If bonds sold at a discount then the total issue price will be

Answer 12

Less than the face amount

Question 13

5 year bond, interest semi annual is how many periods

8 percent interest on the table is

Answer 13

10 periods on the time value table

Interest is annual so it becomes 4 percent

10 periods at 4 percent

Question 14

Discount bond proceeds

Use market rate and number of periods - factor on the table is

Answer 14

Present value of 1

Half the annual interest rate if paid semiannual and years is converted to periods

Question 15

Discount bond proceeds
Determining the interest payment
Use market rate and periods on what table

Answer 15

PV of an annuity

Question 16

Pay attention to whether bonds are sold at a discount or premium to eliminate potential answers

Answer 16

A bond sold at a discount will be sold for less than face

Calculate face amount and interest amount

Question 17

Interest payment

Answer 17

Bond payable (face amount) times stated rate (coupon)
Interest payment never changes because of the bond debenture
~~~

Question 18

Interest expense

Answer 18

Bond carrying amount (face plus the discount or premium) times the market rate …. This amortization lowers or raises the bond closer to the face

Question 19

Premium bonds

The amortization of premium

Answer 19

Reduces interest expense and reduces the carrying value

It is market rate times carry value- each interest payment lowers carry value closer to face

Question 20

Annuity tables
Interest payment use
Principle pymt use

Answer 20

Interest pymt: PV ordinary annuity w coupon rate

Principal pymt: PV of $1 w market rate

Question 21

Calculating the long term liability

Answer 21

1. Figure the interest payment
   Bond face value times market rate times PV ordinary annuity factor
2. Figure the principal payment
   Bond face value times PV of $1 factor
   Add them together