C-11_Class_Notes_Bonds_Payable_

C-11_Class_Notes_Bonds_Payable_ - ACCT 100 Spring 2009...

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ACCT 100 Spring 2009 Chapter 11 Current and Long-term Liabilities Bonds Payable: Terminology- Bonds- Promise to pay the face value on maturity date and pay, or accrue, interest each period until the maturity date. Face Value- Amount printed on the bond certificate (this is the same thing as the principle on a note). Maturity Date- Date when face value becomes due (printed on bond certificate). Contract Rate- Interest rate paid on the bond (printed on bond certificate) Yield: Market rate of interest Leverage: the use of borrowed money to increase return to investors. The other option would be to raise capital by issuing more stock, but that reduces the EPS. On the other hand, with bond financing comes the obligation to use future cash flows to make interest payments to bondholders. Three scenarios in which bonds are issued: 1. Bonds are issued when the contract rate and the market rate are the same. (Issued at Par) 2. Bonds are issued at a discount when the contract rate is less than the market yield 3. Bonds are issued at a premium when the contract rate exceeds the market yield. **The main issue is that we need to value the bonds when they are issued by taking into account the present value of future cash flows associated with the bonds. Therefore, we need to use the Time Value of Money tables in order to arrive at the correct valuation of the bond payable liabilities. This approach differs slightly based on which of the three scenarios occur at the time of bond issuance. Bonds are issued when the contract rate and the market rate are the same (Issued at Par). There are two “cash flow streams” that need to be discounted back to their present values. 1. Present value of the bond’s face value (i.e., Table 2 Present Value of a Lump Sum). 2.
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This note was uploaded on 09/09/2011 for the course ACCT 100 taught by Professor Ftom during the Spring '08 term at S.F. State.

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C-11_Class_Notes_Bonds_Payable_ - ACCT 100 Spring 2009...

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