Lecture 17

Question 1

similarity b/w long-term notes and bonds

Answer 1

borrower’s obligation is to make payments in accordance w/ contractual agreement

principal & interest

Question 2

bond

Answer 2

2 kinds of cash payments
1. lump sum payment due on day the contract expires (par value, face value, maturity value, principal amount)

2. equal payments @ regular intervals over contract term; determined by par value and coupon (nominal, stated, contractual) rate

Question 3

coupon payment =

Answer 3

par value * (nominal coupon rate / #coupon payments per year)

Question 4

issue price

Answer 4

price @ which bond originally issued

amount received by firm from lenders @ date of issue

PV of future maturity payments & coupon payments discounted at market rate of interest @time bond was issued

Question 5

historical interest rate

Answer 5

interest rate the market demanded when the bond was issued

Question 6

historical interest rate per period =

Answer 6

annual market rate @issuance / # payments per year

Question 7

current interest rate

Answer 7

interest rate @which the bonds are currently trading in the market

Question 8

premium (discount) at issue =

Answer 8

issue price - par value

Question 9

net book value =

Answer 9

PV of all remaining future cash flows using the HISTORICAL interest rate

Question 10

current market value =

Answer 10

PV of all remaining future cash flows using the CURRENT market interest rate

Question 11

interest expense (per compounding period) =

Answer 11

NBV @start of period * Historical interest rate per period

Question 12

historical interest rate =

Answer 12

(Issue price? / Market price) - 1

Question 13

effective interest method

Answer 13

requires that interest expense each period is based on the effective interest rate implicit in the lending arrangement when it was initiated (historical market interest rate)

Question 14

proceeds at issuance depend on…

Answer 14

FV of bond
Coupon interest rate
effective interest rate at issuance (market rate when issued)

Question 15

Cash proceeds =

Answer 15

PV Principal + PV Annuity Coupon

*use semi-annual coupon rate

Question 16

Journal entry for bonds issued @par

Answer 16

cash

   bonds payable

Question 17

bond issued @discount

Answer 17

when market rate > coupon rate

Question 18

journal entry for bond issued @discount

Answer 18

cash
discount on bonds payable

   bonds payable

Question 19

interest payments for bonds not issued at par

Answer 19

1. cash paid - does NOT change

2. interest expense - CHANGES over time

Question 20

cash payments =

Answer 20

face value * coupon rate

Question 21

interest expense =

Answer 21

NBV * historical rate

Question 22

journal entry for interest payment @par

Answer 22

int exp

  cash

Question 23

journal entry for interest payment @discount

Answer 23

int exp

   cash
   discount on bonds payable

Question 24

journal entry for bond retirement

Answer 24

bonds payable

   cash

Question 25

NBV for bond @discount =

Answer 25

face value - total unamortized discount

Question 26

bond issued @premium

Answer 26

when market rate

Question 27

journal entry for bond issued @premium

Answer 27

cash bonds payable premium on bonds payable

Question 28

the coupon rate is used ONLY FOR...

Answer 28

determining coupon payment, NOTHING ELSE!

Question 29

NBV of bond issued @premium =

Answer 29

face value + total unamortized premium

Question 30

early retirement of debt

Answer 30

if amount paid to retire LT liability is different from book value, firm recognizes a gain or loss from transaction

Question 31

journal entry for interest payments @premium

Answer 31

int exp premium on bonds payable cash

Question 32

journal entry for gain on debt retirement for bond issued @discount

Answer 32

bonds payable cash gain on debt retirement discount on bonds payable

Question 33

interest expense for par

Answer 33

= interest payments

Question 34

interest exp for discount

Answer 34

> interest payments

Question 35

interest exp for premium

Question 36

balance sheet carrying value for par

Answer 36

= face value

Question 37

balance sheet carrying value for discount

Answer 37

= face value - discount

Question 38

balance sheet carrying value for premium

Answer 38

= face value + premium

Question 39

interest payments

Answer 39

USE COUPON RATE FOR ALL 3 TYPES

Question 40

interest rate for par

Answer 40

coupon = market

Question 41

interest rate for discount

Answer 41

coupon

Question 42

interest rate for premium

Answer 42

coupon > market

Question 43

cost of borrowing for all 3 types

Answer 43

effective rate (market rate at time of issuance)

Question 44

cash proceeds - par

Answer 44

= face value

Question 45

cash proceeds - discount

Question 46

cash proceeds - premium

Answer 46

> face value

Question 47

discount on bonds payable is a ___ acount

Answer 47

contra liability

Question 48

EB book value of bond

Answer 48

BB + Int exp - coupon payment