Lecture10_student - Reporting and Interpreting Bonds...

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Reporting and Interpreting Bonds Chapter 10
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Characteristics of Bonds Payable $ Bond Issue Price $ Bond Certificate At Bond Issuance Date Bonds payable are long-term debt for the issuing company. Company Issuing Bonds Investor Buying Bonds
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Cash flows associated with bonds 0 1 20 20 Years bond with 6% interest rate bonds with face value $100,000. The interest is paid at the end of the year annually. Money Borrowed = Principal × Stated Rate × Time Interest payment Companies always need to repay the face value when the bond is due. 2
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The process of bond issurance Pre-order by the underwriter prior to issuance date Term of the bond: coupon rate, principle amount, maturity of the bond; Company Underwriters Investors in the market 1000 900 1100 Maturity date Issuance date
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1. Face Value (Maturity or Par Value, Principal) 2. Maturity Date 3. Stated Interest Rate 4. Interest Payment Dates 5. Bond Date Characteristics of Bonds Payable Other Factors: 6. Market Interest Rate 7. Issue Date BOND PAYABLE Face Value $1,000 Interest 10% 6/30 & 12/31 Maturity Date 1/1/19 Bond Date 1/1/09
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Bond Classifications Debenture bonds Not secured with the pledge of a specific asset. The riskiest bond is called “junk bond”. Callable bonds May be retired and repaid (called) at any time at the option of the issuer. Convertible bonds May be exchanged for other securities of the issuer (usually shares of common stock) at the option of the bondholder. Zero coupon bond An indenture is a bond contract that specifies the legal provisions of a bond issue.
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Zero Coupon Bonds Zero coupon bonds do not pay periodic interest. Because there is no interest annuity . . . This is called a deep discount bond . PV of the Principal = Issue Price of the Bonds
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Reporting Bond Transactions Accounting for the Difference Stated Market Bond Par Value There is no difference Rate Rate Price of the Bond to account for. Stated Market Bond The difference is accounted Rate Rate Price of the Bond for as a bond discount. Stated Market Bond The difference is accounted Rate Rate Price of the Bond bond premium. Rates Price Interest Bond = < > = < > Present Value of the Principal (a single payment) + Present Value of the Interest Payments (an annuity) = Issue Price of the Bond
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Bonds Issued at Par On January 1, 2009, Harrah’s issues $100,000 in bonds having a stated rate of 10% annually. The bonds mature in 10 years and interest is paid semiannually. The market rate is 10% annually.
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Lecture10_student - Reporting and Interpreting Bonds...

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