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WSU ACCTG 230 - Pricing a Bond

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Acct 230 1st Edition Lecture 24Outline of Last Lecture I. Current Liabilities a. Overview of Long Term DebtOutline of Current Lecture II. Long-Term Liabilities a. Pricing a Bond Current LectureIII. Determine the price of a bond issuea. Issue price is calculated as the present value of the face amount plus the present value of the periodic interest payments.i. Bonds can be issued at:1. Face amount2. Below face amount (discount)3. Above face amount (premium)ii. Ways to determine the issue price of bonds:1. Financial calculator2. Excel Spreadsheet3. Calculate the price of the bonds using present value tablesiii. Market Interest Rate – true interest rate used by investors to value a company’s bond issue.1. The higher the market interest rate, the lower will be the bondissue price. iv. Stated Interest Rate – rate quoted in the bond contract used to calculate the cash payments for interest.v. Periods to Maturity – number of years to maturity multiplied by the number of interest payments per year.b. Bonds Issued at Face Amounti. Pricing Bonds Issued at Face Amount Using a Financial Calculatorii. Illustration of RC Enterprises: 1. The face amount equals $100,000. The interest payment everysix months is $3,500 (= $100,000 x 7% x ½ year). These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.2. The market rate can be equal to, less than, or greater than the stated 7% interest rate paid to investors. Let’s first assume the market interest rate is 7%. RC’s bonds pay interest semi-annually for 10 years.iii. An alternative to using a financial calculator is to calculate the issue price of the bonds using present value tables. c. Bonds Issued at a Discounti. RC Enterprises issues the same $100,000 of 7% bonds when other bonds of similar risk and maturity are paying 8%. ii. RC’s bonds are less attractive to investors because they can purchase bonds of similar risk that are paying the higher 8% rate. iii. RC will have to issue its 7% bonds below its $100,000 face amount. iv. Bonds issued below face amount are said to be issued at a discount. v. Pricing Bonds Issued at a Discount Using a Financial Calculatord. Bonds issued at a Premiumi. RC Enterprises issues $100,000 of 7% bonds when other bonds of similar risk and maturity are paying only 6%. ii. Investors will pay more than $100,000 for 7% bonds since they look relatively attractive compared with bonds paying only 6%. iii. These bonds will sell for a premium. A premium occurs when the issue price of a bond is above its face amount. In this case, RC’s bondswill sell for more than


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