Bonds & Debt Restructuring Flashcards

1
Q

What is a serial bond?

A

Any bond that matures in installments

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2
Q

What is a term bond?

A

Any bond that matures on a single date

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3
Q

What is a debenture bond?

A

A bond not secured by any collateral

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4
Q

What is a sinking fund bond?

A

Cash is held in a sinking fund for repayment of bond at maturity - 5 years of requirements and maturity details should be disclosed

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5
Q

What is the formula to calculate proceeds of a bond sale?

A

PV of Principal Payment at Maturity
+ PV of Interest Payments Made
= Market Value of Bond Proceeds

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6
Q

How is the present value of a bond calculated?

A

Step 1: PV of $1 @ Yield Rate (not Stated Rate) x Bond Face Value +
Step 2: PV of an Ordinary Annuity of $1 for Term @ Yield x (Stated Rate x Face)

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7
Q

Which costs are included in bond issuance costs? How are they recorded?

A

Include: engraving, printing, legal, underwriter, registration
dr to a deferred charge account and amortized over life of Bond using S/L
Bond Proceeds - Bond Issuance Costs = Net Bond Proceeds (time of amortization begins when issued)

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8
Q

How are bonds reported when classified as trading securities?

A

Reported at FMV with unreleased G/L being included in earnings

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9
Q

How are bonds amortized under the interest method?

A

Both discount and premium amortization amounts increase each year

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10
Q

What is the stated rate for a bond?

A

Rate on the face of the Bond

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11
Q

Describe the Book Value Methods when converting from bonds to stocks

A

No G/L recognized. APIC is the plug for the difference between the Bond’s BV and the Par Value of the Common Stock

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12
Q

What is the market rate on a bond?

A

Rate that bonds are currently selling for

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13
Q

What happens when the bond’s market rate is GREATER than the stated rate?

A

Bond will need to sell at a discount in order for buyers to be interested. The difference in market rate vs the stated rate is made up by the buyer purchasing the bond for less than par value.

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14
Q

What happens when a bond’s market rate is LESS than the stated rate?

A

Bond will need to sell at a premium in order for buyers to be interested. The difference in market rate vs stated is made up by the buyer purchasing the bond for more than par value

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15
Q

How does accrued interest on a bond affect the purchase price?

A

The total cash that seller receives will be MORE than they normally would (set aside any considerations for premium or discount, they are irrelevant for this point). Basically, the purchaser of the bonds must give the bond issuer the amount of accrued interest up front.

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16
Q

When does interest expense start accruing on a bond?

A

When the bonds are issued

17
Q

How is an interest payment on a bond calculated?

A

Cash for payment = Stated rate x face amount

18
Q

What amount of interest is expensed on a bond interest payment?

A

Interest expense = Effective Yield x Carrying Value.

Any difference between expense and cash payment is applied as amortization against premium/discount

19
Q

What are convertible bonds? Which recording method is used?

A

Bonds that can be converted to stock - Book Value Method is used if no G/L. Market Value Method used if there is a G/L

20
Q

How is the retirement of bonds recorded?

A

G/L is Ordinary. Extraordinary if both unusual and infrequent.

21
Q

When is a gain recognized in a debt restructuring?

A

If terms are modified and future payments are now less than the carrying amount of the debt, then a Gain is recognized.

22
Q

What is the gain recognized under a settlement of debt?

A

Gain recognized: difference between cash paid and carrying amount of debt. Difference between non-cash asset given and re-valued at FMV and debt carrying amount.

23
Q

For a creditor, how is a loan impairment recorded?

A

If future cash flows discounted at loan’s Effective Interest Rate are less than Carrying Value: ER calculated using original rate - not modified rate