Zero coupon convertible notes the previously issued

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Zero-Coupon Convertible Notes The previously issued $5.4 billion zero-coupon convertible notes due 2021, which resulted in gross proceeds of approximately $3 billion, were redeemable at the option of the holders on May 15th in each of the years 2004, 2006, 2011, and 2016. On May 15, 2004, $3,292 million of principal amount of the notes ($1,984 million after unamortized discount) were redeemed. On May 15, 2006, we redeemed the remaining $1,375 million accreted principal of the remaining outstanding zero-coupon convertible principal. The total payment on the date of redemption was $1,377 million. en Verizon issued its zero-coupon convertible notes in May 2001, they had a maturity value of .4 billion and were slated to mature in 2021. No interest is paid in the interim. The notes sold for billion. The difference between the $3 billion sales proceeds and the $5.4 billion maturity value represents Verizon's interest costs, which is the return to the investor. The effective cost of the debt - the interest rate that equates the issue price and maturity value, or approximately 3%. Cash 10,OOO,(lOO LTD 10,000,000 Cash 10,000,000 I LTD I 10,000,000 Cash 8,640,999 LTD 8,640,999 Cash 8,640,999 I LTD I 8,640,999
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over the life of the bond is called amortization. The next section shows how discount amortiza- tion results in additional interest expense in the income statement. This amortization causes effective interest expense to be greater than the periodic cash interest payments. 7-17 Module 7 I Liability Recognition and Nonowner Financing Premium Bonds When a bond is sold at a premium, the cash proceeds and net bond liability are recorded at amount of the proceeds received (not the face amount of the bond). Again, using the facts abo from our premium bond illustration, the financial statement effects follow: Balance Sheet Income Statement Transaction Cash Asset + Noncash = Assets it Contrib. Earned + Capital + Capital . "'- Rev- Expen· Net enues - ses = Income Liabil- ities = Cash 11.635,129 LTD 11,635,129 Cash 11,635,1291 LTD 111,635,129 Issue bonds +$11 ,635,129 at premium Cash for cash +$11,635,129 = Long-Term Debt The bond liability reported on the balance sheet, again, consists of two parts: Calculator N=6 INr=2 PMT = 9,000 FV = 600,000 !PV = 583,195.71 Bonds payable, face. , . , , , , .. Add bond premium . , .. , , . , . Bonds payable, net ... , .. , .. $10,000,000 1,635,129 $11,635,129 The $10 million must be repaid at maturity, and the premium amortized to zero over the life of bond. The premium represents a benefit, which reduces interest expense on the income statem Effects of Discount and Premium Amortization For bonds issued at par, interest expense reported on the income statement equals the cash inre- est payment. However, for bonds issued at a discount or premium, interest expense reported the income statement also includes any amortization of the bond discount or premium as follo Cash interest paid + Amortization of discount Interest expense or Cash interest paid Amortization of premium Interest expense Specifically, periodic amortization of a discount is added to the cash interest paid to get inte expense. Amortization of the discount reflects the additional cost the issuer incurs from iss - the bonds at a discount. Over the bond's life, the discount is transferred from the balance s
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