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14 Cards in this Set
- Front
- Back
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PV of interest payments |
PVOA = interest payments x PVOA factor for n periods of interest payment and the market rate divided by the number of periods of interest payment |
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Present value of maturity amount/face value |
PV of lump sum = lump sum x PV of $1 factor for n periods of interest payment and the market rate divided by the number of periods of interest payment |
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How do you calculate the present value of a bond? |
The present value of a bond equals: 1. The present value of interest payments + 2. The present value of a maturity amount |
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What happens to the value of an existing bond when market rates decrease? |
An exisiting bond's mkt value will decrease when market rates increase. The reason is that an existing bond's fixed interest payments are smaller than the interest payments now demanded by the market. |
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What happens to the value of an existing bond when market rates increase? |
An exisiting bond's mkt value will increase when market rates decrease. The reason is that an existing bond's fixed interest payments are larger than the interest payments now demanded by the market. |
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Relationship between market interest rates and bond's market value |
They move in opposite direction |
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If stated rate = market rate, bond is issued at? |
Par 9% = 9% |
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If stated rate is greater than market rate, bond is issued at? |
Premium 9% > 8% |
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If stated rate less than market rate, bond is issued at? |
Discount 9% < 10% |
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Bonds with detachable stock purchase warrants |
- Two separate securities (debt and equity) - Value of a security is determined by its percentage of the total value of both |
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Determining value of bonds with detachable stock warrants |
Example: $800 par value bonds with warrants are issued for $900. The fair market value of bonds to warrants is 80% bonds and 20% warrants Total proceeds = $900 FMV of bonds = 900*80%=720 FMV of warrants =900*20%=180 Dr. Cash. 900 Dr. Discount. 80 Cr. Bonds payable. 800 Cr APIC - warrants. 180 |
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Discounts and Premiums on bonds with warrants |
Discount looks like a premium BUT it's not. Premium looks like discount BUT it's not |
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Retirement of a bond |
Journal Dr. Bonds payable Dr. Premium Dr. Loss if any Cr. BIC Cr. Discount Cr. Cash Cr. Gain if any |
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Convertible Bond |
Considered as one security until conversion Two ways of converting are: 1. Book value conversion method is GAAP and 2. Market Value is not. No gain/loss with BV method, but gain/loss recognized with MV method. |
