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Flashcards in Bonds Debt Restructure Deck (24):

What is a serial bond?

Any bond that matures in installments


What is a term bond?

Any bond that matures on a single date


What is a debenture bond?

A bond not secured by any collateral


What is a sinking fund bond?

Cash is held in a sinking fund for repayment of bond at maturity

5 years of requirements and maturity details should be disclosed


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

Present Value of the principal payment at maturity
+ Present Value of Interest Payments made
: Market Value of Bond Proceeds


How is the present value of a bond calculated?

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)


What's in Bond Issuance Costs (BIC)?
How recorded (amortized)?

Engraving & Printing,
Legal & Accounting Fees,
Underwriter Commissions,
Promotion & Registration Costs

DR to Deferred Charge Account and
S/L Amortization over Life of Bond


How are bonds reported when classified as trading securities?

Reported at FMV with unreleased gains and losses being included in earnings


How are bonds amortized under the interest method?

Both discount and premium amortization amounts increase each year


Describe the book value method when converting from bonds to stocks.

-No gain or loss recognized.
-APIC is the plug for the difference between the Bond's Book Value (CV) and the Par Value of the Common Stock.
-"APIC follows CV"
When CV > PAR, APIC Increases
When CV < PAR, APIC Decreases

-R/E is Not Affected by Bond to Stock Conversion


What is the stated rate for a bond?

Rate on the face of the bond


What is the market rate on a bond?

Rate that bonds are currently selling for


What happens when the bond's market rate is greater than the stated rate?

Stated Rate < Mkt Rate =

Bond will need to sell at a DISCOUNT in order for buyers to be interested.
The difference in market rate vs. the stated is made up by the BUYER Purchasing Bond for LESS THAN PAR value


What happens when a bond's market rate is less than the stated rate?

Stated Rate > Mkt Rate =

Bond will need to sell at a PREMIUM in order for buyers to be interested.
The difference in market rate vs. the stated is made up by the BUYER Purchasing Bond for MORE THAN PAR value


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

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.


When does interest expense start accruing on a bond?

When the bonds are issued


How is an interest payment on a bond calculated?

Cash for payment : Stated rate x Face amount


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

Effective yield x CV=Int Exp

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


What are convertible bonds?
Which recording method is used?

Bonds that can be converted to stock.
BOOK VALUE if NO gain or loss.
MKT VALUE if YES gain or loss


How is the retirement of bonds recorded?

Gain or Loss is Ordinary
or Extraordinary if both unusual and infrequent


When is a gain recognized in a debt restructuring?

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


What is the gain recognized under a settlement of debt?

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


For a creditor, How is Loan Impairment recorded--effective rate vs modified rate?

If FCFs discounted at loan's Effective Rate are < CV, then Effective Rate calculated using original rate (not modified rate)


Anytime Debt is converted into C/S Equity, SE Increases

RE is not affected whey Bonds convert into Stock.