Acct 230 1st Edition Lecture 24 Outline of Last Lecture I Current Liabilities a Overview of Long Term Debt Outline of Current Lecture II Long Term Liabilities a Pricing a Bond Current Lecture III Determine the price of a bond issue a 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 amount 2 Below face amount discount 3 Above face amount premium ii Ways to determine the issue price of bonds 1 Financial calculator 2 Excel Spreadsheet 3 Calculate the price of the bonds using present value tables iii 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 bond issue 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 Amount i Pricing Bonds Issued at Face Amount Using a Financial Calculator ii Illustration of RC Enterprises 1 The face amount equals 100 000 The interest payment every six months is 3 500 100 000 x 7 x 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 semiannually 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 Discount i 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 Calculator d Bonds issued at a Premium i 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 bonds will sell for more than 100 000
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