TOPIC 2 pt.2

Question 1

Loan With Constant Installments

Answer 1

In this case, you subtract the initial Fees. But the amortised cost table works the same way.

Question 2

Entries for Loans

Answer 2

1. Debt Formalisation

D
Cash in Banks

C
Long-term Debt with F.I
Short-term Debt with F.I

2. Monthly Intrest

D
Intrest Expense
C
Current Interest on debt with F.I

3. Payment

D
Current Interest on debt with F.I
Short Term debt with F.I

C
Cash in Banks

4. Reclassification

D
Long-term debt with F.I

C
Short term debt

Question 3

Issuing Bonds

Answer 3

Companies issue bonds (stocks) to investors to borrow funds. They are a liability to the issuer. It is found in the liability section in the Balance Sheet, under Bonds and Obligations.

Question 4

Relevant Concepts when issuing bonds

Answer 4

• Par value
• Redemption = Repayment
• Coupon = Nominal Intrest on par value
• The principal paid is the same throughout the whole period

Question 5

Entires for Issuing Bonds

Answer 5

1. Agreement

D
Cash in Banks

C
Bonds and Obligations
Current Bonds and Obligations

2. Intrest

D
Interest on Bonds and Obligations

C
Current Intrest on debentures and sim. issues (506)

3. Intrest Payment

D
Intrest on debentures…(506)

C
Cash in Banks
Witholding tax payable

4. Repayment of Short term Bons

• I announce the payment

D
Current Bonds and Obligations
C
Redeemed Marketable Securities

• I pay

D
Redeemed Marketable securities
C
Cash in Banks

• I reclassify

D
Bonds and Obligations
C
Current bonds and obligations

Question 6

Why are nominal and effective interest rates different?

Answer 6

Because the effective interest rate includes transaction costs while the nominal does not