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Chapter 10

MGT 11A Chapter Notes - Chapter 10: Premium Bond


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

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PREMIUM BONDS: bond issuances above par
Issuing Bonds at a Premium
When the contract rate is higher than the market rate, the bonds sell at a price higher
than par value
Issuer gets more money at issuance than what the issuer must pay back at
maturity
Premium on Bonds: amount by which the bond price exceeds par value
Ex: Adidas issues bonds with a $100,000 par value, a 12% annual contract rate,
semiannual interest payments, and a 2 year life
Adidas bonds sell at premium price of 103.600 (meaning 103.600% of
par value, or $103,600)
Cash Payments with Premium Bonds
These bonds require Adidas to pay:
1) Par value of $100,000 cash at the end of the bonds’ 2 year-life
2) Semiannual cash interest payments of $6,000 ($100,000 x 12% x ½
year)
Recording Issuance of Premium Bonds
Ex: When Adidas receives $103,600 cash for its bonds on the issue date of Dec
31, 2018
Bonds payable are reported as a long-term liability on Adidass Dec 31, 2018
balance sheet
Premium is added to par value to get the carrying (book) value of bonds
Amortizing Premium Bonds
Ex: Adidas received $103,600 for its bonds; in return, it pays bondholders
$100,000 after 2 years (plus 4 interest payments)
Panel A shows that the 4 $6,000 interest payments minus the $3,600
bond premium equals total bond interest expense of $20,400
Premium is subtracted bc it reduced the issuers cost
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