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# Chapter+10+Slides - Chapter 10 Chapter 10 Reporting and...

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Chapter 10 Reporting and Interpreting Bonds Slide 1 Chapter Ten ACCT 2010 Fall 2011 Allen Huang Present Value and Future Value ܲݎ݁ݏ݁݊ݐ ܸ݈ܽݑ݁ = ܨݑݐݑݎ݁ ܸ݈ܽݑ݁ ሺ1 + ݎሻ ݐ ܨݑݐݑݎ݁ ܸ݈ܽݑ݁ = ܲݎ݁ݏ݁݊ݐ ܸ݈ܽݑ݁ ∗ ሺ1 + ݎሻ ݐ Slide 2 Chapter Ten ܲݎ݁ݏ݁݊ݐ ܸ݈ܽݑ݁ = ܥ 1 ሺ1 + ݎሻ 1 + ܥ 2 ሺ1 + ݎሻ 2 + ܥ 3 ሺ1 + ݎሻ 3 + ⋯

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ܲݎ݁ݏ݁݊ݐ ܸ݈ܽݑ݁ = ܥ 1 + ܥ 2 + ܥ 3 + ⋯ Perpetuities & Annuities ܲݎ݁ݏ݁݊ݐ ܸ݈ܽݑ݁ = ሺ1 + ݎሻ 1 ሺ1 + ݎሻ 2 ሺ1 + ݎሻ 3 = ܥ ∙ ൬ 1 ሺ1 + ݎሻ 1 + 1 ሺ1 + ݎሻ 2 + 1 ሺ1 + ݎሻ 3 + ⋯ ൰ ܥ 1 ሺ1 + ݎሻ 1 ܥ 1 ܥ Slide 3 Chapter Ten = ܥ ∙ ൦ 1 − 1 1 + ݎ ൪ = ܥ ∙ ݎ = ݎ ܸܲ = ܥ ݎ Perpetuities & Annuities PV of Annuity Formula ܲݎ݁ݏ݁݊ݐ ܸ݈ܽݑ݁ = ܸܲሺܲ݁ݎ݌݁ݐݑ݅ݐݕ 1ሻ − ܸܲሺܲ݁ݎ݌݁ݐݑ݅ݐݕ 2ሻ = ܥ ݎ ܥ ݎ 1 ሺ1 + ݎሻ ݐ = ܥ ∙ ൤ 1 ݎ 1 ݎ ∙ ሺ1 + ݎሻ ݐ C = cash payment Slide 4 Chapter Ten r = interest rate t = Number of years cash payment is received
Liabilities Defined and Classified Liabilities are d t th i measured at their present value at the time incurred. This is the amount a creditor would Slide 5 Chapter Ten a creditor would accept to cancel the debt. Understanding the Business The mixture of debt and equity used to finance a company’s operations is ll d th it l t t called the capital structure: Slide 6 Chapter Ten Debt - funds from creditors Equity - funds from shareholders

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Characteristics of Bonds Payable Advantages of bonds: Stockholders maintain control because debt holders can not Disadvantages of bonds: ` Risk of bankruptcy increases because the interest and vote. Interest expense is tax deductible. (Tax shield of interest expense) The impact on earnings is positive because money can often be borrowed at a low interest rate and invested to principal must be paid back as scheduled or creditors will force legal action. Slide 7 Chapter Ten earn a higher return. (increase ROE) Characteristics of Bonds Payable Face Value \$1,000 Coupon 10% Jun 30 & Dec 31 1. Face Value (Maturity or Par Value, Principal) BOND PAYABLE Maturity Date 1/1/19 Bond Date 1/1/09 Slide 8 Chapter Ten 2. Bond Date 3. Maturity Date (Principal Repayment Date) 4. Stated Interest Rate (Coupon Rate) 5. Interest Payment Dates Other factor: 6. Market Interest Rate(Yield, Effective Interest Rate, or Discount Rate)