Chapter 14 HW - Chapter 14 Question 14-3 Bonds and...

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Chapter 14 Bonds and Long-Term Notes Question 14-3 Bonds and notes are very similar. Both typically obligate the issuing corporation to repay a stated amount (e.g., the principal , par value , face amount , or maturity value ) at a specified maturity date . In return for the use of the money borrowed, the company also agrees to pay interest to the lender between the issue date and maturity. The periodic interest is a stated percentage of face amount. In concept, bonds and notes are accounted for in precisely the same way. Normally a company will borrow cash from a bank or other financial institution by signing a promissory note. Corporations, especially medium- and large- sized firms, often choose to borrow cash by issuing bonds and instead of borrowing from a lending institution, it borrows from the public. A bond issue, in effect, breaks down a large debt into manageable parts ($1,000 units) which makes it more attractive to individual and corporate investors. Also, bonds typically have longer maturities than notes. The most common form of corporate debt is bonds. Question 14-5 In order for Brandon to sell its bonds that pay only 11.5% stated interest in a 12.25% market the bonds would have to be priced at a discount from face amount. The discount would be the amount that causes the bond issue to be priced to yield the market rate . In other words, an investor paying that price would earn an effective rate of return on the investment equal to the 12.25% market rate. Question 14-11 Rising interest rates, other factors remaining the same, cause prices of fixed-rate securities to fall. For the investor in these securities, the price decline represents a loss; but for Cordova Tools, the debtor, the decline in the value of the liability is a gain. If Cordova has elected the fair value option for the bonds, it will report the gain on change in the fair value of the bonds in its income statement. Question 14-15 For all long-term borrowings, disclosure should include (a) the fair values, (b) the aggregate amounts maturing, and (c) sinking fund requirements (if any) for each of the next five years . Question 14-18 GAAP requires that the entire issue price of convertible bonds be recorded as debt, precisely the same way, in fact, as for nonconvertible bonds. On the other hand, the issue price of bonds with detachable warrants is allocated between the two different securities on the basis of their market values. The difference is based on the relative separability of the debt and equity features of the two securities. In the case of convertible bonds, the two features of the security, the debt and the
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conversion option, are physically inseparable — the option cannot be exercised without surrendering the debt. But the debt and equity features of bonds with detachable warrants can be separated. Unlike a conversion feature, warrants can be separated from the bonds and can be exercised independently or traded in the market separately from bonds.
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This note was uploaded on 05/08/2010 for the course ACCTG 322 taught by Professor Gill during the Spring '08 term at San Diego State.

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Chapter 14 HW - Chapter 14 Question 14-3 Bonds and...

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