ACCT 200 1st Edition Lecture 18 Outline of Last Lecture I BE C 2 II BE C 5 III BE C 8 IV BE C 11 V BE C 12 VI Miscellaneous VII Example Outline of Current Lecture I Types of Bonds II Bonds Offered at a Discount III E 9 4 IV BE 9 9 Current Lecture Read and know different types of bond characteristics will be definition questions on exam Unsecured bonds are riskier than secured bonds and will have higher interest rates Callable bonds less interest can pay anytime as interest rates change Convertible bonds lender can t force shareholders to convert bonds to stock Market rate of interest determines if a bond is sold at face value or a premium or discount Interest payment is based on stated or contract rate of interest Use the tables based on the market rate of interest Concept is when you have a low interest rate you can offer your bond at a premium so that effectively the bondholders earn 8 because of your discount E 9 4 Face value of bond principal 25 000 000 Market rate of interest 5 annually 2 5 per half year Contract stated rate of interest 6 annually 3 per half year Semi annual interest 10 year bond 20 periods because it s 2 payments per year 2 steps to value the bond 1 Figure out interest payment amount Face value contract rate 1 2 rate 25 000 000 03 750 000 2 Take present value calculations 25 000 000 PV table 2 2 5 20 periods 25 000 000 61027 750 000 PVA table 4 2 5 20 periods 750 000 15 58916 Add together to get total present value of the bond cash to be received by borrower Journal entry borrow Dr cash present value cr bond payable Annuity equal annual or semiannual payments Tables on test will have the same titles and be in the same order as they are in the book If market rate of interest and contract stated rate are equal then total present value face value Bond issuer is borrower Always use table at market rate of interest for step 2 contract rate to calculate interest payment BE 9 9 Example 1 Dr cash 26 948 620 Cr bond payable 26 948 620 Interest 6 30 Dr interest expense net bond payable 1 2 market rate of interest 26 948 620 2 5 673 716 Dr bond payable balance of cash interest exp 76 284 will keep changing as market rate changes Cr cash 750 000 Cash is paid at contract rate interest expense is paid at market rate If market and stated rates are equal the journal entry will just have dr interest expense and cr cash both at 750 000 If market rate for interest expense is above stated rate dr interest expense cr cash and bond payable
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