notes for bonds.docx - Deep-discount bonds also referred to as zero-interest debenture bonds are sold at a discount that provides the buyer's total

notes for bonds.docx - Deep-discount bonds also referred to...

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Deep-discount bonds , also referred to as zero-interest debenture bonds , are sold at a discount that provides the buyer's total interest payoff at maturity. Also by definition you do not pay any periodic interest and the investor is compensated by the difference in the price at which the bonds are issued vs the maturity date. Accounting for zero coupon bond At the issuance the company would debit cash and credit bonds payable for. At the end of first year end it will debit interest expense and credit bonds payable At the end of second year it will debit interest expense and credit bonds payable by an amount This procedure would lead to a balance in the bonds payable account. At maturity the company will debit bonds payable and credit cash. Bonds are rated according to the financial stability of the issuer and other factors. There are several bond rating companies, such as Standard & Poor's and Moody's. The best bonds are rated AAA using Moody's rating scale, for instance. The highest rated bonds show that the issuer is of the highest financial stability. The issuer, as a result, will be able to issue bonds at a lower interest rate than a company with a lower rating. The interest rate that a company is required to pay for bonds issued will vary because of several factors, such as the length of the issue and the bond rating of the company, as well as items such as call provisions. I have found this article from the American Accounting Association about research in regarding bond rating being reported adjusted to GAAP Financial Statements that I would like to share with everyone: ABSTRACT: I examine a dataset of both quantitative (hard) adjustments to firms' reported U.S. GAAP financial statement numbers and qualitative (soft) adjustments to firms' credit ratings that Moody's develops and uses in its credit rating process. I first document differences between firms' reported and Moody's adjusted numbers that are both large and frequent across firms. For example, primarily because of upward adjustments to interest expense and debt attributable to firms' off-balance sheet debt, on average, adjusted coverage (cash flow-to-debt) ratios are 27 percent (8 percent) lower and adjusted leverage ratios are 70 percent higher than the corresponding U.S. GAAP ratios. I then find that Moody's
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  • Spring '12
  • KING
  • Moody, Leary

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