Chapter 10 Bonds Accounting 215 Winter 2026 Steph Grant Review Time Value of Money Chapter 9 motivating question 1 000 today vs 1 000 one year later which would you take Time Value of Money Opportunity Cost If you save 1 000 in the bank you receive interest Uncertainty Something could happen to the money because you receive it one year later Inflation Things get more expensive over time so 1 000 can buy more today 1 2 Review Time Value of Money Time Value of Money Calculations translate all future cash into its present value Suppose a gym owner purchased a set of pull up rigs and weightlifting power racks with a loan The term of the loan is that the gym owner must pay 500 every six months for the next two years and an additional 10 000 at the end of year 2 Assume that the current annual discount rate is 12 how much is the gym owner paying for the gym equipment in present value terms Annuity 500 500 500 500 Single Amount 10 000 Solutions Step 1 Identify discount factors i 12 2 6 DF Annuity 3 46511 N 4 DF Single Amount 0 79209 Step 2 Calculate the present value Present Value PV Annuity PV Single Amount DF Annuity Annuity DF Single Amount Single Amount 3 46511 500 0 79209 10 000 9 653 46 3 4 Plan for Today 1 Characteristics of bonds 2 Price a bond 3 Report bond transactions and understand their implications on the financial statements 5 6 Motivation From Shareholders Jan 1 Peter and Sam contribute 4 400 to form Joe Chocolate They each receive 100 shares of common stock From a Bank Jan 1 Joe Chocolate borrows 26 000 cash from a bank Question What if Joe Chocolate wants to borrow some additional money Capital Raising 7 8 Capital Raising Through Bonds Jan 1 Year 1 Joe Chocolate issues 10 bonds to investors Capital Raising Through Bonds June 30 Year 1 Joe Chocolate pays bondholders interest in cash Capital Raising Through Bonds Dec 31 Year 1 Joe Chocolate pays bondholders interest in cash 9 10 Capital Raising Through Bonds June 30 Year 2 Joe Chocolate pays bondholders interest in cash Capital Raising Through Bonds Dec 31 Year 2 Joe Chocolate pays bondholders the last interest in cash and the principal 11 12 Summary Question Where are these numbers coming from Issuance Company sells bond and receives proceeds 9 653 46 500 500 500 500 Company pays bondholders periodic cash interest payments Maturity Company pays principal face value and last interest payment 10 000 Cash Flows Joe Chocolate receives cash from the bond issuance Joe Chocolate pays a total of cash to the bondholders Basic Elements of a Bond On January 1 Joe Chocolate issues 10 bonds Face Value Also called Principal Par Value Amount paid at maturity date Term Also called Maturity Length of time from the bond s issue date to the date the issuer must repay the face value Joe Chocolate 1 000 Bond Due in 2 Years Coupon Rate Also called the Stated Rate Nominal Rate Annual rate used to calculate cash interest payment Frequency payments 10 Interest Paid Semi Annually Frequency of cash interest Note Issuing bonds is like selling tickets each ticket promises the same payment but the total money raised depends on how many tickets are sold In this case Joe Chocolate sells 10 bonds each with a face value 1 000 13 14 Cash Interest Payment On January 1 Joe Chocolate issues 10 bonds Life of a bond Joe Chocolate 1 000 Bond Due in 2 Years 10 Interest Paid Semi Annually 500 500 500 500 Company pays bondholders periodic cash interest payments Cash interest payment Face Value x Coupon Rate Plan for Today 1 Characteristics of bonds 2 Price a bond 3 Report bond transactions and understand their implications on the financial statements 15 16 Pricing a Bond Issuance Company sells bond and receives proceeds 9 653 46 500 500 500 500 Company pays bondholders periodic cash interest payments Maturity Company pays principal face value and last interest payment 10 000 17 18 Recall that Time Value of Money Calculations translate all future cash into its present value Suppose a gym owner purchased a set of pull up rigs and weightlifting power racks with a loan The term of the loan is that the gym owner must pay 500 every six months for the next two years and an additional 10 000 at the end of year 2 Assume that the current annual discount rate is 12 how much is the gym owner paying for the gym equipment in present value terms Annuity 500 500 500 500 Single Amount 10 000 Solutions Step 1 Identify discount factors i 12 2 6 DF Annuity 3 46511 N 4 DF Single Amount 0 79209 Step 2 Calculate the present value Present Value PV Annuity PV Single Amount DF Annuity Annuity DF Single Amount Single Amount 3 46511 500 0 79209 10 000 9 653 46 Pricing a Bond Calculations On January 1 Joe Chocolate issues 10 2 year 10 coupon rate 1 000 bonds Interest is payable every 6 months The market interest rate on January 1 is 12 Issuance Company sells bond and receives proceeds 9 653 46 500 500 500 500 10 000 Issue Price PV Cash Interest Payments PV Principal 19 20 Pricing a Bond Important Notes On January 1 Joe Chocolate issues 10 2 year 10 coupon rate 1 000 bonds Interest is payable every 6 months The market interest rate on January 1 is 12 500 500 500 500 10 000 Cash Interest Payment Use coupon rate Fixed rate written in the bond contract Set by the firm Bond Issue Price Calculations Use market interest rate Determined by the supply and demand in the bond market If I were to lend money to you given the risk and how long it ll take you to pay me back I d demand a return of X Why should the bond price be the PV On January 1 Joe Chocolate issues 10 2 year 10 coupon rate 1 000 bonds Interest is payable every 6 months The market interest rate on January 1 is 12 Investors purchase the bonds at 9 653 46 the present value of future cash payments from Joe Chocolate to the bondholders What if Joe Chocolate issues the bonds at PV Annuity PV Single Amount 9 653 46 10 000 PV Annuity PV Single Amount 9 653 46 9 500 10 000 9 500 Firm Love this Investor I can purchase another bond from another firm at a much cheaper price 9 654 46 and receive the same cash flow Nobody will buy the bond Investor the PV of future cash flows is more than 9 500 Instant profit Firm Have to pay more than what they receive today A loss You Try On January 1 Joe Chocolate issues 10 2 year 10 1 000 bonds Interest is payable every 6 months The market interest rate on January 1 is 8 a How much cash interest payment will Joe Chocolate make to bondholders every 6 …