Class 19 Chapter 10 BondsPlanWhat are bonds?What is a bond?What is a bond ?Business BackgroundSlide 7Slide 8Characteristics of Bonds PayableBond ClassificationsSlide 11Lost ?Slide 13A bond is a series of cash flowsMeasuring Bonds Payable and Interest ExpenseSlide 16Slide 17Issuing Bonds at parSlide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Recording Bonds Issued at parSlide 30Slide 31Issuing Bonds at a discountSlide 33Slide 34Slide 35Slide 36Recording Bonds Issued at a DiscountSlide 38Bond DiscountBond discountBonds Issued at a Discount Financial Statement PresentationZero-coupon bondsSlide 43Issuing Bonds at a PremiumSlide 45Slide 46Slide 47Slide 48Slide 49Slide 50Bonds Issued at a Premium Financial Statement PresentationBond premiumPP1PP2Next Class1Class 19Chapter 10 BondsAccounting 2610Xiumin Martin3/26/20132PlanWhat is a bond?Types of bondsBond calculationsAccounting for bonds3What are bonds?Company Issuing BondsCompany Issuing Bonds$ Bond Issue Price $Investor Buying BondsInvestor Buying BondsBond CertificateBonds payable are long-term debt for the issuing company.Bonds are loans taken by firms from a large group of investors – the public.4What is a bond?Company Issuing BondsCompany Issuing BondsPeriodicPayments$ $Investor Buying BondsInvestor Buying BondsFace Value Payment at End of Bond Term$ $What is a bond ?1. Face Value = Maturity or Par Value, Principal2. Bond Date 3. Maturity Date4. Stated Interest/coupon Rate5. Interest Payment DatesOther Factors:6. Market Interest RateThis is the rate for bonds with similar risk characteristics. There may be a different rate for bonds of different firmsBOND PAYABLEFace Value $1,000Interest 10%6/30 & 12/31Maturity Date 1/1/11Bond Date 1/1/006Business Background Bonds can be traded on established exchanges that provide liquidityliquidity to bondholders. Bonds can be traded on established exchanges that provide liquidityliquidity to bondholders.As liquidity increases . . .. . . Cost of borrowing decreases.7Business Background Advantages of bonds:Bonds are debt, not equity, so the ownership and control of the company are not diluted.Interest expense is tax-deductible. Advantages of bonds:Bonds are debt, not equity, so the ownership and control of the company are not diluted.Interest expense is tax-deductible.8Business BackgroundDisadvantages of bonds:The scheduled interest payments are legal obligations and must be paid each period.A single, large principal payment is required at the maturity date.Disadvantages of bonds:The scheduled interest payments are legal obligations and must be paid each period.A single, large principal payment is required at the maturity date.9Characteristics of Bonds PayableWhen issuing bonds, potential buyers of the bonds are given a prospectus.The company’s bonds are issued to investors through an underwriter.The trustee makes sure the issuer fulfills all of the provisions of the bond indenture.When issuing bonds, potential buyers of the bonds are given a prospectus.The company’s bonds are issued to investors through an underwriter.The trustee makes sure the issuer fulfills all of the provisions of the bond indenture.10Bond ClassificationsDebenture bondsDebenture bonds Not secured with the pledge of a specific asset.Callable bondsCallable bondsMay be retired and repaid (called) at any time at the option of the issuer.Redeemable bondsRedeemable bondsMay be turned in at any time for repayment at the option of the bondholder.Convertible bondsConvertible bondsMay be exchanged for other securities of the issuer (usually shares of common stock) at the option of the bondholder.Debenture bondsDebenture bonds Not secured with the pledge of a specific asset.Callable bondsCallable bondsMay be retired and repaid (called) at any time at the option of the issuer.Redeemable bondsRedeemable bondsMay be turned in at any time for repayment at the option of the bondholder.Convertible bondsConvertible bondsMay be exchanged for other securities of the issuer (usually shares of common stock) at the option of the bondholder.11Senior Debt Senior Debt receives preference over other creditors in the event of bankruptcy or default.Subordinated Debt Subordinated Debt is riskier than senior debt.Senior Debt Senior Debt receives preference over other creditors in the event of bankruptcy or default.Subordinated Debt Subordinated Debt is riskier than senior debt.Bond Classifications12Lost ?What is a bond?Types of bondsBond calculationsAccounting for bonds13What is a bond ?1. Face Value = Maturity or Par Value, Principal2. Bond Date 3. Maturity Date4. Stated Interest/coupon Rate5. Interest Payment DatesOther Factors:6. Market Interest RateThis is the rate for bonds with similar risk characteristics. There may be a different rate for bonds of different firmsBOND PAYABLEFace Value $1,000Interest 10%6/30 & 12/31Maturity Date 1/1/10Bond Date 1/1/0014A bond is a series of cash flows200920006/006/09Issue date 1/1/2000Maturity date 1/1/2010Issue price is the PV of the series of cash flows.A series of 20 semi-annual equal payments of $50+One future principal payment of $1,00015Measuring Bonds Payable and Interest Expense The issue price of the bond is determined by the market, based on time value of money.The interest rate used to compute the present value is the market interest rate on the market interest rate on the issuing dateissuing date.16Measuring Bonds Payable and Interest Expense The stated ratestated rate is only used to compute the periodic interest payments.17Lost ?What is a bond?Types of bondsBond calculationsAt parAt a discountAt a premiumAccounting for bondsAt issue dateTaking account of discounts and premiums18Issuing Bonds at parOn May 1, 2001, Harrah’ s issues $1,000,000 in bonds having a stated rate of 6% annually. The bonds mature in 10 years and interest is paid semiannually. The market annual interest rate is 6%.On May 1, 2001, Harrah’s issues $1,000,000 in bonds having a stated rate of 6% annually. The bonds mature in 10 years and interest is paid semiannually. The market annual interest rate is 6%.Compute the issue price of Harrah’s bonds.19Issuing Bonds at par2009200111/01 11/09Issue date 5/1/2001Maturity date 5/1/2011n=20$1,000,00020Issuing Bonds at parCompute the present value of the principal.Use the present
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