F4:M4-Bonds Part 1

Question 1

How is the market price of a bond issued at a premium calculated?

Answer 1

The market price of a bond issued at a premium is the sum of:

1. The present value of the bond’s principal amount,
2. Plus the present value of all future interest payments,

Both discounted using the market (effective) interest rate at the time of issuance.

Question 2

How is the market price of a bond calculated?

Answer 2

**Market price **= Present value of principal + Present value of all future interest payments, both calculated using the market interest rate.

Question 3

When is a bond issued at a discount or premium?

Answer 3

Issued at Premium - Stated Rate on Bond > Market (effective) Interest Rate on date bonds are issued.

**Issued at Discount **- Coupon/Stated Rate on Bond < Market (effective) Interest Rate on date the bonds are issued.

Question 4

What are detachable stock warrants?

Answer 4

Warrants that give the buyer the right to buy company stock later.

Question 5

When given a PV (present value) factor table how is bond interest and principal calculated?

Answer 5

Present Value (PV) of period interest payments = the coupon payments or interest

Present Value (PV) of the principal repayment - Face Value repaid at majurity

Question 6

How is interest expense calculated?

Answer 6

Interest Expense = Carrying Value of Bond × Market Interest Rate

Question 7

How is the bond selling pricing computed?

Answer 7

The price is the sum of the present value of the future principal payments + the present value of the period interest payments discounted using the market/effective rate on the date the bonds were issued.

Question 8

What is the preferred method of accounting for bond issuance cost under US GAAP?

Answer 8

Deducted from the carrying amount of the liability and amortized using the effective interest method.