Chapter 10:Bonds Flashcards Preview

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Flashcards in Chapter 10:Bonds Deck (33):
1

Bonds: General Characteristics

Issued by companies only when large amounts of -money is needed to be raised for acquisition of long term assets.
- The corporation receives the cash at the original issuance
-Principal is repaid at maturity date whereas interest is paid semiannually or yearly.
-They have a long life (10 – 30 years)
-Principal = Face = Maturity value = PAR

2

Interest is typically paid

semi-annually--based on the annual interest rate STATED on the bond document.

3

Stated Rate may be called

STATED = COUPON = FACE INTEREST = NOMINAL = CONTRACTURAL

4

Interest expense on the Income Statement reflects the

market interest rate

5

Market Interest Rate =

= Effective Interest Rate = Yield Rate

6

Interest expense is

tax deductible

7

Dividends declared

are NOT tax deductible for the issuer of stock.

8

Interest revenue (bonds) and dividend revenue (stocks) are

included in taxable income of creditor/investor.

9

If investor buys between interest date

then investor pays the market price of the bond plus interest accrued from last issuance date to date of purchase to the seller

10

Interest Payment Formula

IP= P x Sr x T

11

Premium

we ↑  NI by ↓ Interest Expense through the process of amortization

12

Discount

we ↓NI by ↑ Interest Expense through the process of amortization

13

Premium: Interest Expense
Discount : Interest Expense

Premium: Interest Expense = Cash Paid for Interest MINUS
the amortization of the premium

Discount : Interest Expense = Cash Paid for Interest PLUS
the amortization of the discount





14

Interest Expense (IE) is based

on the MR (market rate) of interest

15

Interest Paid (cash or interest payable)

is based on the SR (stated rate) of interest

16

New Financing Activities

1. Issue Bonds (inflow of cash)
2. Repay principal at maturity date (outflow of cash).

17

The increase and decrease statements about bonds

-By decreasing premium (through amortization) we will be adding a smaller and smaller number to the bonds payable (carrying value gets smaller).
-By decreasing discount account, we will be subtracting a
smaller and smaller number to bonds payable so carrying value gets larger and larger

18

Proceeds

= issuance price = market price on issue date

19

Face =

maturity value = principal

20

Carrying value=

book value, net liability.

21

Stated rate=

coupon rate, nominal rate, face interest rate, contractual rate

22

Market rate=

yield rate, effective rate

23

Cash paid is based on

stated rate at time of issuance: IP = P x SR x T.

24

Interest expense on I/S

approximates the market rate of interest at time of issuance.

25

Two things that are the same on chart

-bonds payable recorded at
-cash paid

26

Proceeds vs Value (Chart)

see handout

27

Bonds payable at recorded at (chart)

see h....

28

carrying value (chart)

see h....

29

changes to book value(chart)

see h....

30

SR vs MR(chart)

see h....

31

Interest Expense(chart)

see h...

32

Cash Paid(chart)

see h.......

33

Ch.10 question 16

Payroll deductions are recorded as liabilities. Gross earnings are recorded as salaries and wages expenses. Net pay is recorded as salaries and wages payable.