MGT 11A Chapter Notes - Chapter 10: Premium Bond
Document Summary
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 ,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 ,600) 1) par value of ,000 cash at the end of the bonds" 2 year-life. 2) semiannual cash interest payments of ,000 (,000 x 12% x year) Ex: when adidas receives ,600 cash for its bonds on the issue date of dec. Bonds payable are reported as a long-term liability on adidas"s dec 31, 2018 balance sheet. Premium is added to par value to get the carrying (book) value of bonds.
