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ch10_instructor_sp08_temp - ACG 2021 Accounting for...

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1 ACG 2021 Accounting for Decisions Ch10 - Recording and Interpreting Bonds Yunhao Chen ychen@fiu.edu
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2 What do we hope to learn? Definition and terminology Proceeds from bonds Bonds issued at premium and discount Amortizing bond premium or discount Classifications of bonds
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3 What are Bonds? Bonds – debt instruments sold to the public Alternative to stock for raising larger amounts of long-term financing Individual bonds are often denominated with a par value, or face value , of $1,000.
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4 What’s on a bond coupon? A certificate of bond (or a coupon of bond) states: Maturity date Interest rate: The rate at which cash interest is calculated and paid to bondholders; Referred to as the coupon rate, or stated interest rate, or contract interest rate; Interest cash payment = face value × stated interest rate Face value: the amount bond holder receive at maturity date
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5 Bonds – Cash Flows A bond holder has the right to two cash inflows: Periodic interest payments Lump sum repayment of face amount of bond at maturity How to determine the periodic interest payments? (principle x stated rate)
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6 Proceeds of Bonds is the cash flow that issuing company receives from the sale (issuance) of bonds; not necessarily equal to the face amount of bonds is also called the issuing price of bonds , or the selling price corporate bonds are publicly traded at bond market, just like stocks are traded at stock market;
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7 Terminology: Bonds issued at Discount, Premium, Par Example: $1,000, 6% face interest rate. The market rate of interest is 8%. Who would buy firm ABC’s bond at 6%? Nobody---so ABC has to sell (issue) it at a discount . i.e., bondholders would give ABC something less than the face value for the bond. Now, assume the market rate of interest is 4%. Who would buy these bonds? EVERYONE! So the market will bid up the price of the bond; i.e., ABC will get a premium for it Bondholders will pay ABC more than the face value
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8 Calculating Bond Proceeds The present value of a bond is the sum of the present value of the interest payments, plus the present value of the maturity payment The interest rate used to compute the present value is the market interest rate . Also called yield, effective rate , or true rate . Bond prices have an inverse relationship with market interest rate When interest rates rise, bond prices decrease When interest rates decline, bond prices increase
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9 Calculating Bond Proceeds - formula Issuing (Selling) price of bonds = Present value of face value discounted at the market rate of interest + Present value of periodic interest payments discounted at the market rate of interest
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ch10_instructor_sp08_temp - ACG 2021 Accounting for...

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