"M351 Notes-Day 4 Bonds 1

# "M351 Notes-Day 4 Bonds 1 - M351 Notes Class 4 Bonds...

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M351 Notes, Class 4: Bonds, pages 688 - 703 A. Forms of bonds: secured or not, term, serial, callable, convertible, commodity, zero coupon (deep discount or zero interest), registered, bearer, income, and revenue. B. Bond terminology: 1. Stated or coupon or nominal or face interest rate multiplied times par, principal, face or maturity amount = amount of one interest payment. 2. Par, principal, face or maturity amount = amount paid at maturity (along with the last interest payment). 3. Discount = amount below par bond sells for at issue; contra account 4. Premium = amount above par bond sells for at issue; adjunct account 5. Unamortized discount—amount of discount not yet amortized 6. Unamortized premium—amount of premium not yet amortized 7. Effective or market interest rate—rate used to discount cash flows to get selling price of bond; rate used to calculate interest expense C. Selling price of a bond = present value of cash flows bond issuer will make 1. Bond sold at discount : Assume that a five-year bond’s face amount is \$500,000, that stated interest rate is 8% (4% per six months) and that the market interest rate is 8.3% (4.15% per six months). Discount Bond proceeds = (PVsa, n=10, i=4.15%)(\$500,000) + (PVa, n=10, i=4.15%)(20,000) = (.6659 x \$500,000) + (8.0507 x \$20,000) = \$493,964

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## This note was uploaded on 04/09/2011 for the course MGMT 351 taught by Professor Staff during the Winter '08 term at Purdue.

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"M351 Notes-Day 4 Bonds 1 - M351 Notes Class 4 Bonds...

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