Chapter 14 A Determining the selling price of a bond 1 Calculate payment

Chapter 14 a determining the selling price of a bond

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Chapter 14A.Determining the selling price of a bond1.Calculate payment (principal x statedrate)2.Discount payment as PVA of an ordinary annuity (using marketrate)3.Discount principal repayment as PV of a single sum (using marketrate)4.Add PVA to PV to get issue price5.Difference between face value and issue price is discount or premiumB.Keys to getting it right1.Remember if the market rate is higher than the stated rate, the bondwill sell at a discount every time.2.Remember if the market rate is below the stated rate, it will sell at a premium every time3.If the bond has semi-annual payments, make three adjustments to your calculationsa.Interest payments are only for half a year, so payment = principal xrate x ½
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b.In the PV and PVA tables, use half the market rate, because it’s only half a yearc.In the PV and PVA tables, use twice the number of periods, because payments are two times per yearC.Terminology hints1.Stated rate = coupon rate2.Principal = face value3.Market rate = effective rate = yieldD.Recording issuance1.Debit cash for issue price2.Credit Bond Payable for face value3.Debit Discount on BP for discount or credit Premium on BP for premiumE.
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