Tion above the effective cost of the bond is the 6

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tion above, the effective cost of the bond is the 6% interest paid by the issuer. 'hen a bond sells at a discount, the issuer must repay more (the face value when the bond s) than the cash received at issuance (the discounted bond proceeds). This means that the ive cost of a discount bond is greater than if the bond had sold at par. A discount is a cost like any other cost, must eventually be transferred from the balance sheet to the income ent as an expense. 'hen a bond sells at a premium, the borrower received more cash at issuance than it must _'.The difference, the premium, is a benefit that must eventually find its way into the e statement as a reduction of interest expense. As a result of the premium, the effective of a premium bond is less than if the bond had sold at par. Bonds are priced to yield the return (market rate) demanded by investors. Consequently, the ive rate of a bond always equals the yield (market) rate demanded by investors, regardless - ~ coupon rate of the bond. This means that companies cannot influence the effective cost - bt by raising or lowering the coupon rate. Doing so will only result in a bond premium or nt. We discuss the factors affecting the yield demanded by investors later in the module. The effective cost of debt is reflected in the amount of interest expense reported in the issuer's e statement. Because of bond discounts and premiums, interest expense is usually different prices are often stated in percent form. For example, a bond sold at par is said to be sold at 100 (that is, 100% I. The bond sold at $8,640,999 is said to be sold at 86.41 (86.41 % of par, computed as $8,640,999/$10,000,000). nd sold for a premium is said to be sold at 116.35 (116.35% of the bond's face value). tombstone makes clear that if we purchase any of these notes (in denominations of $1,000) after the semiannual date, we must pay accrued interest in addition to the purchase price. This interest is returned to us in the regular payment. (This procedure makes the bookkeeping easier for the issuer/underwriter because all interest payments 3JIlll1 regardless of when Union Pacific actually sold the bond.) Calculator N = 20 I/Yr = 2 PMT = 300,000 FV = 10,000,000 I PV = 11,635, 143.33*J *rounding difference
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BNPPARIBAS Citi 7·15 Module 7 I Liability Recognition and Nonowner Financing Announcement (Tombstone) of Debt Offering to Public $500,000,000 tit Union Pacific UUW Corporation 4.00% Notes due 2021 We will pay interest on the notes each February 1 and August 1, commencing February 1, 2011. The notes will mature on February 1, 2021. We may redeem some or all of the notes at any time and from time to time at the redemption price described in this prospectus supplement. There is no sinking fund for the notes. See "Description of the Notes" for a description of the terms 0 the notes. Per Note Total Price to Public (1) 99.525% $497,625,000 Underwriting Discount 0.650% $3,250,000 Proceeds to the Company 98.875% $494,375,000 (1) Plus accrued interest, if any, from August 2, 2010.
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