ACCT1021 Chapter Notes - Chapter 10: Callable Bond, Cash Flow, Debenture
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7 Nov 2016
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Companies issue bonds instead of stock because: stockholder"s maintain control, interest expense is tax deductible, issuing bonds can increase the return to shareholders. Disadvantages to issuing bonds: risk of bankruptcy, negative impact on cash flow. Bond usually requires the payment of interest over its life with repayment of principal on the maturity date. Bond principal: the amount a company must pay to bondholders at the maturity date and the amount used to compute the bond"s periodic cash interest payment: also known as face value, par value, or maturity value. Coupon rate: the interest rate specified on a bond, and the rate used to compute the bond"s periodic cash interest payment: always stated in annual terms. Convertible bonds: bond that may be converted to other securities of the issuer. Debenture: an unsecured bond; no assets are specifically pledged to guarantee repayment. Callable bond: bonds that may be called for early retirement at the option of the issuer.
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Garcia Company issues 10%, 15-year bonds with a par value of$170,000 and semiannual interest payments. On the issue date, theannual market rate for these bonds is 8%, which implies a sellingprice of 117 1?4. The effective interest method is used to allocateinterest expense.
1. Using the implied selling price of 117 1?4,what are the issuer's cash proceeds from issuance of thesebonds.
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2. What total amount of bond interest expensewill be recognized over the life of these bonds?
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3. What amount of bond interest expense isrecorded on the first interest payment date?
Bond interest expense: ????