ACCT 301 Exam 2 - Bonds

Bond

A debt instrument through which an issuer borrows money and promises to repay principal and make interest payments.

Face Value of a Bond

The principal amount the issuer promises to repay at maturity.

Stated Interest Rate

The contractual rate used to calculate the bond's cash interest payments.

Market Interest Rate

The rate investors require for comparable debt; used to discount future bond cash flows at issuance and calculate interest expense under the effective interest method.

Cash Interest Payment

Face value × Stated interest rate per period.

Bond Price

The present value of the bond's future principal repayment plus the present value of its future interest payments.

Bond Price Formula

Present value of face value + Present value of interest payments.

Present Value of Bond Face Value

Face value multiplied by the present value factor for a single sum.

Present Value of Bond Interest Payments

Periodic cash interest payment multiplied by the present value of an ordinary annuity factor when payments are equal.

Bond Issued at Face Value

A bond issued when the stated interest rate equals the market interest rate.

Bond Issued at a Premium

A bond issued for more than face value because the stated interest rate exceeds the market interest rate.

Bond Issued at a Discount

A bond issued for less than face value because the stated interest rate is below the market interest rate.

Bond Premium

The amount by which a bond's issue price exceeds its face value.

Bond Discount

The amount by which a bond's face value exceeds its issue price.

Effective Interest Method

A method of amortizing bond premiums and discounts in which interest expense is calculated using the beginning carrying value and the market interest rate per period.

Interest Expense under the Effective Interest Method

Beginning carrying value × Market interest rate per period.

Bond Discount Amortization

Interest expense minus cash interest paid when a bond is issued at a discount.

Bond Premium Amortization

Cash interest paid minus interest expense when a bond is issued at a premium.

Carrying Value of a Discount Bond

Increases over time toward face value as the discount is amortized.

Carrying Value of a Premium Bond

Decreases over time toward face value as the premium is amortized.

New Carrying Value of a Discount Bond

Beginning carrying value + Discount amortization.

New Carrying Value of a Premium Bond

Beginning carrying value − Premium amortization.

Semiannual Bond Interest Expense

Beginning carrying value × (Annual market interest rate ÷ 2).

Semiannual Cash Interest Payment

Face value × (Annual stated interest rate ÷ 2).

Number of Semiannual Periods

Number of years until maturity × 2.

Bond Pricing with Semiannual Payments

Divide the annual stated and market interest rates by two and multiply the number of years by two to determine the number of periods.