HADM_121_FinalExam_Review

HADM_121_FinalExam_Review - Chapter 10 Report and Intr...

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These These Re-compute these amounts for each payment. hese These Re-compute these amounts for each payment. (see above) Chapter 10: Report and Intr. Bonds Characteristics of Bonds Payable 1. Bonds Payable a. Stockholders Maintain Control b. Interest Expense is tax deductible c. The Impact on Earnings is Positive i. Money can be borrowed at a low interest rate and invested at a higher rate 2. Bond Principle a. The amount payable at the maturity of the bond and on which the periodic ash interest payments are computed 3. Par Value a. Another name for bond principal, or the maturity value of a bond 4. Face Amount a. Another name for principal, or the maturity value of the bond 5. The selling price of the bond does not affect the periodic cash payment of interest a. 1000 8% bond always pays cash interest of 80$ on an annual basis 6. Bond Types a. Unsecured Bond, debenture i. No assets are pledged as a guarantee of repayment at maturity 1 | P a g e
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b. Secured Bond i. Specific assets are pledged as a guarantee of repayment at maturity c. Callable Bond i. Bond may be called for early retirement by the issuer d. Convertible Bond i. Bond may be converted to common stock of the issues 7. Indenture a. Bond contract that specifies the legal provisions of a bond issue Reporting Bond Transactions 1. Principle a. Amount is usually a single payment that is made when the bond matures 2. Cash Interest Payments a. These payment which represent an annuity, are computed by multiplying the principal times the interest rate stated in the bond contract. This interest is called the contract, stated, or coupon rate. 3. Market Interest Rate a. Is the current rate of interest on a debt when incurred, also called the yield or effective interest rate 4. Present Value of a Bond 2 | P a g e
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Cash 100000 Bonds Payable 10000 Bonds Interest Expense (E+ SE-) 10000 Cash (A-) 10000 Bonds Issued at Par i. Compute: Single Payment of 100,000 at the end of five years, use present value tables in Appendixes ii. Compute: Interest Payment (10000) using present value interest appendix iii. When the effective rate of interest (the market rate of interest) equals the stated rate of interest, the present value of the future cash flows associated with the bond always equal the bond’s par amount. iv. Bonds selling price is determined by the present value of its future cash flows, not the par value. 5. ** Note Interest expense is report on the income statement. It is releated to Financing so it is not included in operating expenses. RATIO 6. Times Interest Earned a. Times Interest Earned = + + NetIncome InterestExpense Income Tax ExpenseInterestExpense b. High ratio is viewed more favorably than a low one.
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  • Fall '07
  • Dittman

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