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