Specifically we see the income statement effects in

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bond for its duration. Specifically, we see the income statement effects in column [A], the effects in column [B], and the balance sheet effects in columns [D] and [E]. To illustrate amortization of a premium bond, we assume that Verizon issues bonds with a .000 face value, a 3% annual coupon rate payable semiannually (1.5% semiannual rate), a ity of three years (six semiannual interest payments), and a 2% annual (1% semiannual) et interest rate. These facts yield a bond issue price of $617,386.43, which we round to 386. Exhibit 7.4 shows the premium amortization table for this bond. - ~- ~ I =xHIBIT 7.4 Bond Premium Amortization Table Calculator N = 20 IlYr = 1 PMT = 300,000 FV = 10,000,000 :PV = 617,386 L-
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7-19 Module7 I Liability Recognition and Nonowner Financing Interest expense is computed using the same process that we used for discount bonds. The differ- ence is that the yield rate is 1 % semiannual in the premium case. Also, cash interest paid follows from the bond contract (face amount X coupon rate), and the other columns' computations refl the premium amortization. After period 6, the premium is fully amortized (equals zero) and the net bond payable balance is $600,000, the amount owed at maturity. Again, an amortization table reveals the financial statement effects of the bond-the income statement effects in column [A~_ the cash effects in column [B], and the balance sheet effects in columns [D] and [E]. Financial Statement Effects of Bond Repurchase Companies report bonds payable at historical (adjusted) cost. Specifically, net bonds payable amounts follow from the amortization table, as do the related cash flows and income stateme numbers. All financial statement relations are set when the bond is issued; they do not subse- quently change. Once issued, however, bonds trade in secondary markets. The yield rate used to compute bond prices for these subsequent transactions is the market interest rate prevailing at the time, These rates change daily based on the level of interest rates in the economy and the perceived creditworthiness of the bond issuer. Companies can and sometimes do repurchase (or redeem or retire) their bonds prior to matu- rity. The bond indenture (contract agreement) can include provisions giving the company the rigl to repurchase its bonds directly from the bond holders. Or, the company can repurchase bon in the open market. To illustrate, Verizon's lO-K includes the following footnote relating to i repurchase of MCI debt in connection with the MCI acquisition: Redemption of Debt Assumed in Merger On January 17, 2006, Verizon announced offers to purchase two series of Mel senior notes, Mel $1,983 million aggregate principal amount of 6.688% Senior Notes Due 2009 and Mel $1,699 million aggregate principal amount of 7.735% Senior Notes Due 2014, at 101% of their par value ... In addition, on January 20, 2006, Verizon announced an offer to repurchase Mel $1,983 million aggregate principal amount of 5.908% Senior Notes Due 2007 at 101% of their par value ... We recorded pretax charges of $26 million ($16 million after-tax) during the first quarter of 2006 resulting from the extinguishment of the debt assumed in connection with the completion of this merger.
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