bond - BondsandInterestExpense JamesGong...

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Click to edit Master subtitle style Bonds and Interest Expense  James Gong

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Agenda n Present value of money n \$1 n Annuity n Bonds n Coupon rate and market rate n Premium and discount n Notes payable n Extinguishment of bonds
Time Value of Money n Always preferable to receive a given sum of money earlier  rather than later  n Because present dollars can earn interest and n Because borrowing dollars requires payment of interest n Therefore, a dollar received later is worth less than a dollar received  now n Present value (PV) of a future payment is the value of that  future payment in today’s dollars  at a given interest rate. n Alternatively, it is the most anyone would pay today for the right to  receive the future payment

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Assume that you need  \$1,000   in  2 years.   Let’s  examine the process to determine how much you  need to deposit today at a discount rate of  7%  0 1 2 \$1,000 7 % PV 1 PV 0 Present Value of \$Y
PV0  =  FV 2  / (1+ i ) 2   \$1,000   / (1 .07 ) 2       \$873.44 0 1 2 \$1,000 7 % PV 0 Present Value of \$Y

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PV i , n is found on Table II Period 6% 7% 8% 1 .943 .935 .926 2 .890 .873 .857 3 .840 .816 .794 4 .792 .763 .735 5 .747 .713 .681 Present Value of \$Y
Annuities n Series of two or more cash payments or receipts n Each payment the same amount n Time between each payment the same length n Ordinary Annuity :  Payments or receipts  occur at the  end  of each period. n Annuity Due :  Payments or receipts occur at  the  beginning  of each period.

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PVA 3  =  \$1,000 /(1 .07 )   \$1,000 /(1 .07 ) \$1,000 /(1 .07 ) 3                  =  \$934.58 + \$873.44 + \$816.30        =  \$2,624.32 \$1,000 \$1,000 \$1,000 0 1 2 3 4 \$2,624.32 = PVA3 7% \$934.58 \$873.44 \$816.30 Cash flows occur at the end of the period Present Value of Annuities
From Table 4 PVA 3 = \$1,000 ( PVIFA 7% , 3 ) = \$1,000 ( 2.624 ) = \$2,624 Period 6% 7% 8% 1 0.943 0.935 0.926 2 1.833 1.808 1.783 3 2.673 2.624 2.577 4 3.465 3.387 3.312 5 4.212 4.100 3.993 Present Value of Annuities

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The Bond n Bonds are contracts between borrowers and lenders n Borrowers promise to pay a specific sum of money at some future  date n Principal (face value or par value) n Amount of money a bond promises to pay when it matures n Maturity date n Date at which a bond’s principal amount will be paid to bond’s  owner n Coupon payments n Series of periodic payments that a bond promises before maturity
How Much Is A Bond Worth?

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