-Bonds Debt Restructure Flashcards
(21 cards)
What is a serial bond?
A serial bond is any bond that matures in installments.
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What is a term bond?
A term bond is any bond that matures on a single date.
What is a debenture bond?
A debenture bond is 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.
Five 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
PLUS
Step 2: PV of an Ordinary Annuity of $1 for Term @ Yield
x (Stated Rate x Face)
Which costs are included in bond issuance costs? How are they recorded?
Bond issuance costs include:
- Engraving
- Printing Legal
- Underwriter
- Registration
Bond issue costs are subtracted from Carrying Amount of the Bond
Treatment: Retrospective Treatment to all prior periods presented
Effect: Increases Effective Interest Rate
How are bonds reported when classified as trading securities?
When classified as trading securities, bonds are reported at FMV with unrealized 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 and the Par Value of the Common Stock.
What is the stated rate for a bond?
The stated rate is the rate on the face of the bond.
What is the market rate on a bond?
The rate that bonds are currently selling for.
What happens when the bond’s market rate is greater than the stated 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 the bond for less than par value.
What happens when a bond’s market rate is less than the stated rate?
Bond will need to sell at a premium in order for sellers to be interested.
The difference in market rate vs. the stated is made up by the buyer purchasing the 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?
Interest expense starts accruing 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?
Interest expense: effective yield x carrying value
Any difference between expense and cash payment is applied as amortization against the premium/discount.
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?
The gain recognized under a settlement of debt is the:
- 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 a loan impairment recorded?
If future cash flows discounted at loan’s Effective Interest Rate are less than Carrying Value.
Effective Rate calculated using original rate, not modified rate
