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MGT 11A (30)
Chapter 10

MGT 11A Chapter Notes - Chapter 10: Call Option, Bearer Bond, Accrued Interest


Department
Management
Course Code
MGT 11A
Professor
John Hancock
Chapter
10

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Bond Retirement
Bond Retirement at Maturity
Carrying value of bonds at maturity always equals par value
Retirement of these bonds at maturity, assuming interest is already paid and
recorded
Bond Retirement before Maturity
Issuers sometimes retire some or all of their bonds before maturity
If interest rates decline, an issuer may want to replace high-interest-paying bonds
with new low-interest bonds
2 common ways to retire bonds before maturity:
Exercise a Call Option:
Issuer can reserve the right to retire bonds early by
issuing callable bonds
Callable bonds give the issuer an option to call
the bonds before they mature by paying the par
value plus a call premium
Open Market Purchase:
Issuer can repurchase them from bondholders at their
current price
Whether bonds are called or purchased, the issuer is likely to pay a price
different from their carrying value
Issuer records a difference between the bonds’ carrying value and the
amount paid as a gain/loss
Ex: Puma issued callable bonds with a par value of $100,000
Call option requires Puma to pay a call premium of $3,000 to
bondholders plus the par value
Next, assume that after the June 30 interest payment, the bonds
have a carrying value of $104,500. Then on July 1, Puma calls
these bonds and pays $103,000 to bondholders
Puma records a $1,500 gain from the difference between the
bonds’ carrying value of $104,000 and the retirement price of
$103,000 as follows
Bond Retirement by Conversion
Holders of convertible bonds have the right to convert their bonds to stock
When conversion occurs, the bonds’ carrying value is transferred to equity
accounts and no gain/loss is recorded
Ex: Assume on Jan 1, the $100,000 are converted to 15,000 shares of
$2 par value common stock
LONG-TERM NOTES PAYABLE
Unlike bonds, notes are usually issued to a single lender such as a bank
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