Bonds Flashcards
market price of a bond is equal to
The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest Plus the present value of all future interest payments at the market (effective) rate of interest
bonds at premium
Bonds are purchased at a premium when the market interest rate is lower than the stated rate
When the value of a bond goes from a premium to a discount
it would generally mean an increase in interest rates.
noncurrent investment in the bond sinking fund
beg bal \+ additional investment \+div on interest \+int rev - admin exp = balance of sinking fund
serial bond
Serial bonds consist of principal amounts that will not all mature on the same date.
The face amount of serial bonds is repaid in a series of periodic payments, which may or may not be equal in amount or interval.
term bond
The face amount of term bonds is repaid in a lump sum at the end of the bond term
debenture bond
Debenture bonds are unsecured bonds that are not supported by any collateral. Debenture bonds may be term bonds, with a single maturity date, or serial bonds that will not all mature on the same date.
sinking fund bond
Sinking fund bonds are bonds with terms that require the issuer to establish a sinking fund in which funds are accumulated for the repayment of the bonds. Sinking fund bonds may be term bonds, with a single maturity date, or serial bonds that will not all mature on the same date.
Variable rate bonds
are bonds that have a stated rate that varies in accordance with some factor, such as prime rate. The principal may mature at the end of the bond term (term bonds) or may mature in installments (serial bonds).
bond issue cost
Promotion costs
engraving and printing
underwriters’ commission
Bond proceeds at issuance will equal
the sum of the present values and the annual cash coupon interest payments, considered an ordinary annuity, discounted at the effective rate
Convertible debt securities
give the security holder the option of converting the bond into common stock at a future date and at a predetermined price, which is generally higher than the stocks market price on the date of issuance, but may be lower in the future while the bonds are convertible. As a result of the benefit associated with the conversion feature, convertible bonds generally bear interest at a rate that is lower than bonds that are not convertible. A feature to subordinate is not typical, and may apply to bonds whether they are convertible or not
premium
effective rate is lower than stated rate
discount
effective rate is higher than stated rate
j/e to retire bond
DEBIT: bond payable
CREDIT: cash
CREDIT: unamortized discount + bond issue cost
CREDIT: gain (plug)
