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UA ACCT 200 - Bonds - Part I
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ACCT 200 1st Edition Lecture 18 Outline of Last Lecture I. BE C-2II. BE C-5III. BE C-8IV. BE C-11V. BE C-12VI. MiscellaneousVII. ExampleOutline of Current Lecture I. Types of BondsII. Bonds Offered at a DiscountIII. E 9-4IV. BE 9-9Current LectureRead and know different types of bond characteristics – will be definition questions on examUnsecured bonds are riskier (than secured bonds) and will have higher interest ratesCallable bonds – less interest; can pay anytime as interest rates changeConvertible bonds – lender can’t force shareholders to convert bonds to stockMarket rate of interest determines if a bond is sold at face value or a premium or discountInterest payment is based on stated or contract rate of interestUse the tables based on the market rate of interestConcept 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 discountE 9-4Face value of bond (principal)=25,000,000Market 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 amountFace value*contract rate (1/2 rate)25,000,000*.03=750,0002. Take present value calculations25,000,000*PV table 2, 2.5%, 20 periods=25,000,000*.61027750,000*PVA (table 4) 2.5%, 20 periods=750,000*15.58916Add together to get total present value of the bond (cash to be received by borrower)Journal entry (borrow):Dr cash (present value), cr bond payableAnnuity – equal annual or semiannual paymentsTables on test will have the same titles and be in the same order as they are in the bookIf market rate of interest and contract/stated rate are equal, then total present value=face valueBond issuer is borrowerAlways use table at market rate of interest for step 2; contract rate to calculate interest paymentBE 9-9Example 1:Dr cash 26,948,620 Cr bond payable 26,948,620Interest 6/30:Dr interest expense=net bond payable*1/2 market rate of interest=26,948,620*2.5%=673,716Dr bond payable=(balance of cash-interest exp)=76,284 (will keep changing as market rate changes) Cr cash 750,000Cash is paid at contract rate; interest expense is paid at market rateIf market and stated rates are equal, the journal entry will just have dr interest expense and cr cash, both at 750,000If market rate for interest expense is above stated rate, dr interest expense, cr cash and bond

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# UA ACCT 200 - Bonds - Part I

Type: Lecture Note
Pages: 3
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