Section 11 - Bonds and PV Tables

Question 1

What is a Term Bond?

Answer 1

Matures on a SINGLE DATE

Question 2

What is a Serial Bond?

Answer 2

Matures in INSTALLMENTS

Question 3

What is a Debenture Bond

Answer 3

Unsecured

Question 4

What is a Sinking Fund Bonds?

Answer 4

Cash held for Bond Repayment. Requires 5 years of Disclosures.

Question 5

What is the “stated, face, coupon, and nominal rate”?

Answer 5

The rate printed on the bond.

Represents the amount of cash the investor will receive every payment.

Question 6

What is the “effective rate, market interest rate, and yield rate”?

Answer 6

The rate that the bonds are currently selling for.

Question 7

What happens when the Market Rate > Stated Rate?

Answer 7

Bond will be sold at DISCOUNT.

Difference between the rates is made up by the buyer purchasing the bond for LESS than par value.

Question 8

What happens when the Market Rate

Answer 8

Bond will be sold at a PREMIUM.

Difference between the rates is made up by the buyer purchasing the bond for MORE than par value.

Question 9

What is the Carrying Amount of the bond?

Answer 9

Bond amount aka Face +- Premium or Discount

Also called Book Value or Reported Amount. It will initially be the same price as the issue price, but gradually approaches the face value as time passes, since the premium or discount is amortized over the life of the bond.

Question 10

What is Convertible Bond?

Answer 10

Bonds that can be converted to STOCK

Question 11

What is Callable Bond?

Answer 11

Bond which the issuer has the right to redeem prior to its maturity date.

Question 12

How do you calculate the Present Value of the Bond Proceeds?

Answer 12

PV of the Face of the bond = Face x PV
-Use the Market/Yield Rate and not the Stated Rate

PV of the interest as an annuity = Face x Stated Rate x PV of Market/Yield Rate

Sum of these two equal PV of the bond

Question 13

What are included in Bond Issue Costs (BIC)?

Answer 13

Printing and engraving
Legal and accounting fees
Underwrite
Promotion costs
Registration

Question 14

How are BIC treated?

Answer 14

Debited to a Deferred Charge account (non current assets) and amortized over the life of the bond using S/L

Time of amortization begins when ISSUED
EXAMPLE: 5-year bonds date April 1
Bonds arent issued until Sept 1
BIC amortized over 55 months instead of 60 months (April - Sept is 5 months)

Question 15

What is the J/E for Sale of Bonds?

Answer 15

3. Cash (% face + accrued interest - BIC)
4. BIC
5. Discount (plug)
   
   1. Bond Payable (Face)
   2. Accrued Interest Payable
   3. Premium (plug)

Question 16

How are the bond discount or premium amortized?

Answer 16

Effective interest method (GAAP and preferred)

or

Straight-line (NOT GAAP)

Question 17

What is the calculation for Discount/Premium Amortization?

Answer 17

Face +- Premium/Discount = CV x Effective interest rate = Interest expense - cash payment = Amortization of discount

Cash = Face x Stated Rate (this number always stay the same)

JE for Discount
Interest Expense XXX
Discount XXX
Cash XXX

JE for Premium
Interest Expense XXX
Premium XXX
Cash XXX

Question 18

Is interest expense increasing or decreasing when amortizing a discount and premium?

Answer 18

Discount - interest expense increases each year and amortization increases each year

Premium - interest expense decreases each year and amortization increases each year

Question 19

When bonds are retire, how are the gains/losses treated?

Answer 19

Gain/loss reported as Continuing Operations on the I/S. May be reported as Extraordinary if both unusual and infrequent.

JE
Bonds Payable (face)
Premium (unamortized)
Loss (plug)
   BIC
   Discount
   Cash
   Gain (plug)

Question 20

What is a Convertible Bonds?

Answer 20

Bonds that can be converted to stock

Question 21

What are the two ways to convert the Convertible Bonds?

Answer 21

1) Book Value Method (GAAP)
- No gain/loss

2) Market Value Method (Not GAAP)
- Has gain/loss and they are not extraordinaire

Question 22

What is the J/E for Book Value Method?

Answer 22

Bonds Payable (face)
Premium
   BIC
   Common Stock (par value)
   APIC (plug)

Question 23

What is the J/E for Market Value Method?

Answer 23

Bonds Payable (face)
Premium
Loss (plug)
   BIC
   Common Stock (par value)
   APIC
   Gain (plug)

Question 24

Under IFRS, what valuation method should a company use to report their bonds on their financial statements?

Answer 24

Either Amortized Cost or FVTPL

Question 25

Under IFRS, what amortized method is used for bonds?

Answer 25

Effective Interest Method only. BIC reduce the carrying value of bonds and amortized under the Effective Interest Method.