Prof. Zhang‘s Handout_Chapter 10
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Reporting and Interpreting Bonds
Advantages and Disadvantages of Bonds:
Advantages of Bonds over Common Stock:
Bond
Common Stock
Impact on Owners’ Control
Impact on Earnings per Share
Tax Benefit
Disadvantage of bonds:
Accounting for Bonds Issuance and Interest
1. Pricing the bonds
Calculation of bond price
Present value of principal
Present value of coupon payments
What information do you need to price a bond?
Principal (face value, par value)
Coupon rate (stated rate)
Market rate (effective rate)
Term of the bond
Number of coupon payments per year
Example: Dali Company plans to issue $800,000, five year bonds that pay 6% annually on December 31. All of the bonds will be sold on January 1. Determine the issue price assuming a market yield of 5%, 6%, 7%.
2. The general rules guiding bond issuance:
Stated rate = Market rate
Bond price = par value of the bond
Issue Bond at par
(sold at 100%)
Stated rate < Market rate
Bond price < par value of the bond
Issue Bond at a discount
(sold less than 100%)
Stated rate > Market rate
Bond price > par value of the bond
Issue bond at a premium
(sold more than 100%)
Issuing Bonds at par:
Bonds payable is recorded on the balance sheet at its face value.
Over the term of the bond, entries are required for coupons paid to bondholders
Example
On January 1, 202x, Company A issued $200,000, five-year, 8% bonds at 100. Interest would be paid annua 内容过长，仅展示头部和尾部部分文字预览，全文请查看图片预览。 e issuer.
b.
Convertible bonds.
b.
Bonds that may be converted to common stock at the option of the bondholder.
Bond Indenture specifies bond offering details; Prospectus specifies bond offering details, debt covenants designed to protect creditors, and usage of proceeds of bond issuance.
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