F4M4/5: Bonds

Question 1

Market (effective rate) > Stated rate

Answer 1

Discount; the investor will pay less than face value of the loan

Question 2

Market (effective rate) < Stated rate

Answer 2

Premium; investors pays more than the face value of the loan

Question 3

Carrying value of bonds for Premium and Discount

Answer 3

Premium: Face value + unamortized premium

Discount: Face value - unamortized discount

Question 4

Bond Amortization schedule: Premium / Discount

Answer 4

Period| Coupon Pmt| Interest exp| Inc or Dec CV of bonds| Unamort Amt| Carrying value

Question 5

Present value $1

Answer 5

Apples to face value or lump sum of principal payment

Question 6

Present value of ordinary (end) and annuity due (beginning)

Answer 6

Applies to coupon interest payments

Question 7

Principal payment (PV) + Interest payment (PV) =

Answer 7

Bond issuance price
Sale proceeds

Question 8

Premium = CV decreases over time

Discount = CV increases overtime

Answer 8

TRUE

Question 9

Bond issuance @ a discount

Answer 9

dr. Cash
dr. Bond discount payable
cr. Bond liability

Question 10

Bond issuance @ a premium

Answer 10

Issuance:
dr. Cash
cr. Bond premium payable
cr. Bond liability

Payment:
dr. Bond interest expense
dr. Bond premium payable
cr. Cash

Question 11

Calculating Interest Payable

Answer 11

1. Determine outstanding principal
2. Rate * time period * principal

Question 12

CV at beginning of period * Effective market rate =

Answer 12

Interest expense

Question 13

Contract (stated) rate * principal outstanding =

Answer 13

Interest expense for bonds issued at par

Question 14

Bond terms:

Face value (FV) = $ amt company issues

Stated (coupon rate) = interest paid to investor in cash

Market (effective rate) = investor interest earned

Answer 14

True

Question 15

How to apply to two time value of money concepts for present values

Answer 15

PV $1 = principal and interest

PV of an annuity $1 = multiple equal payment overtime

Question 16

How should accrued interest be handled when when a bond is issued?

Answer 16

Interest accrued from the bonds dates to the date issues ; you must added the accrued interest to the to the sales price of the bond.

Sales price ($200,000 *101%)

Plus

Accrued interest
($200,000 * 9% * 5/12)

________________________
$209,500 Cash received