ADMN 2021H Lecture Notes - Lecture 4: Book Value, Interest Expense, Premium Bond
28 Jun 2018
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ADMN2100H: Financial Accounting II
What is Bond?
It is a debt security, "fixed income security"
Bond's Cash Flows from the Company's Perspective
Consider a bond with an interest rate of 5% and annually interest payments. The par value (nominal
value) is $1,000 and the bond has 5 years to maturity (expiry date). The market rate is 11% (current
market rate for this type of bond).
Valuing a Discount Bond with Annual Payments
Consider a bond with an interest rate of 5% and annually interest payments. The par value (nominal
value) is $1,000 and the bond has 5 years to maturity (expiry date). the market rate is 10% (current
market rate for this type of bond).
owhat is the interest payment?
$50
oWhat is t (number of periods)?
5 times (5 years, once a year)
oWhat is the face value?
$1,000 (Nominal value)
oWhat is the market rate?
10%
oWhat is the value of the bond?
Example – Semiaunnual Interest Payment
Suppose you have an 8% annual interest payments, bond with a face value of %1,000 that matures in 7
years. The effective rate is 8%.
oWhat is the interest payment
80/2 = $40
owhat is the number of periods?
7 years
owhat is the face value?
$1,000
owhat is the market rate?
8%/2 = 4%
Valuing a Premium Bond with Annual Coupons
Suppose you are looking at a bond that has a 10% annual interest payment and a face value of $1,000.
There are 20 years to maturity and the market rate is 8%. What is the price of this bond?
oWhat is the coupon payment?
oWhat is t?
oWhat is the face value?
oWhat is the rate of return?
oWhat is the price of this bond?
Accounting for Bond Issues
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Document Summary
It is a debt security, "fixed income security" The par value (nominal value) is ,000 and the bond has 5 years to maturity (expiry date). The market rate is 11% (current market rate for this type of bond). Consider a bond with an interest rate of 5% and annually interest payments. Suppose you have an 8% annual interest payments, bond with a face value of %1,000 that matures in 7 years. The effective rate is 8%: what is the interest payment. Suppose you are looking at a bond that has a 10% annual interest payment and a face value of ,000. There are 20 years to maturity and the market rate is 8%. Semi-annual interest payment (dates when the company pays the coupon payment) 6% (6/2) = 3% (multiply face value of bond x the coupon interest rate, divided by the number of payments during the year)
