Lecture17 2010.11.14 postclass

Lecture17 2010.11.14 postclass - Lecture 17 Accounting for...

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Lecture 17 Accounting for Long Term Debt Issuance of Bonds
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Announcements • Exam #2 grades to be posted tomorrow • Homework #3 to be posted tomorrow • Re-grade requests: not until after Thanksgiving • Final Exam policy (review the syllabus): – Illness/medical excuse: Spring 2011 – Precise date set by Registrar
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Goals of Today’s Class • Overview of Liabilities • Review from Last Class (Notes and Mortgages) • What is a bond? – Terminology • Effective interest rate method for accounting for a bond issued at: – a premium – par – a discount
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Accounting for Long Term Debt Types of long-term debt: • Note - A non-interest bearing note requires that the borrower make a single payment (to the lender) on the maturity date of the note (i.e. the date when the note agreement expires) • Mortgage - A typical mortgage note requires that the borrower make a series of equal periodic (monthly, quarterly, semi-annually, annually) payments over the term of the mortgage. • Bond - A typical bond (interest bearing note) is a combination of a non- interest bearing note and a mortgage. Requires that the borrower make a series of equal periodic payments over the term of the bond agreement (i.e. equivalent to mortgage payments), and a single relatively larger lump-sum, "balloon", payment on maturity date of the bond (i.e. equivalent to the non-interest bearing note payment). In each of these cases, the borrower's obligation is to make payments in accordance with the contractual agreement. Each of the payments to be made by the borrower may include amounts representing: – a (partial) repayment of the original amount borrowed – principal ; – a payment for the cost of using the lenders funds – interest .
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What is a bond? 1) The typical bond contract obligates the borrower to make two kinds of cash payments: i) a single lump-sum payment due on the day that the contract expires. This payment also may be referred to as: " par value ", " face value ", " maturity value " or " principal amount " of the bond. ii) a series of equal payments at regular intervals over the term of the contract. Each of the payments, referred to as " coupon " payments, is determined by the par value of the bond, the coupon rate (also referred to as the “ nominal ”, “ stated ”, or “ contractual ” interest rate) and the number of compounding periods per year: 2) The expiration, or “ maturity date ” specified in the bond contract determines both when the par value payment is due, and the number of coupon payments to be made over the remaining term of the agreement. Coupon Payment = Par Value x Nominal (coupon) Rate No. of Coupon Payments per Year
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More Terminology Issue Price = Price at which the bond was originally issued = Amount received by the firm from lenders (bond-holders) at the date of issue (i.e. amount borrowed) = Present value of future maturity payment and coupon payments discounted at the market rate of interest at that time when the bond
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This note was uploaded on 12/18/2010 for the course ACCT 101 taught by Professor Armstrong during the Fall '09 term at UPenn.

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Lecture17 2010.11.14 postclass - Lecture 17 Accounting for...

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