BONDSPAYABLECHAPTER17Bonds1,000BondCertificateInvestorFirmBondsAbondisasecurity,usuallylong-term,representingmoneyborrowedbyacorporationfromtheinvestingpublic.Bond

CertificateThefacevalueofthebondis$1,000orsomemultipleof$1,000.BondsThetotalnumberofbondsthatareissuedatonetimeiscalledabondissue.$10,000bondissue$1,000bond$1,000bond$1,000bond$1,000bond$1,000bond$1,000bond$1,000bond$1,000bond$1,000bond$1,000bond

Thespecifictermsofabondissuearespecifiedina

bondindenture.

BondIndentureBondindentureMaturitydateInterestpaymentdatesInterestrateRepaymentplansrestrictionsRightsPrivilegesLimitationsItgenerallydetermineswhetherthereisacompanycallthedebt,andwhatisthepreferenceinliquidationintheeventofcorporatefailure.InterestRateandMarketInterestRateFaceinterestrate

marketinterestrateItistherateofinterestpaidtothebondholdersbasedonthefacevalueorprincipalofthebondsThemarketinterestrateistherateofinterestpaidinthemarketbybondinvestorsforbondsofsimilarrisk.ascloseaspossibleto

InterestRateandMarketInterestRateFaceinterestrate≠

marketinterestrateMarketinterestrate＞FaceinterestrateTheissueprice＜FacevalueThebondsaretobeissuedatadiscount.Marketinterestrate＜FaceinterestrateTheissueprice＞FacevalueThebondsaretobeissuedatapremium.InterestRateandMarketInterestRateToillustrate,let’s

lookatan

example

…InterestRateandMarketInterestRateLet’sassumethatAndersonCompanyissues5-year,8%

bonds.Bondshavea$1,000facevalue,andpayinteresteverysixmonths.InterestRateandMarketInterestRateIfthemarketinterestrateis8%whenAndersonIssuesits8%bonds,1,000$40everysixmonthsINVESTORSAtmaturitydate,theywillalsogettheir$1,000investmentback.InterestRateandMarketInterestRateIfthemarketinterestrateis10%whenAndersonIssuesits8%bonds,INVESTORSAtmaturitydate,theywillalsogettheir$1,000investmentback.$40everysixmonthsPurchaseatadiscountThediscountequalstheexcessoffacevalueoverissueprice.InterestRateandMarketInterestRateIfthemarketinterestrateis6%whenAndersonIssuesits8%bonds,INVESTORS$40everysixmonthsAtmaturitydate,theywillalsogettheir$1,000investmentback.PayapremiumThepremiumisequaltotheexcessoftheissuericeoverthefacevalue..BondsIssuedatFaceValue

BondsIssued

atFaceValue

BondsIssuedatFaceValue

SupposethatAndersonCompanyhasissued100ofits5-year8percentbondsatfacevalueonApril1,20X0.InterestispaidonOctober1andApril1ofeachyear.

BondsIssuedatFaceValueTheentryApril1,20X0Cash$100,000BondsPayable$100,000October1ofeachyearInterestExpense4,000Cash4,000

InterestwaspaidinfullthroughOctober1.BondsIssuedatFaceValueDec.31from20X0to20X4

InterestExpense2,000InterestPayable2,000Theyear-endentrymustbepreparedtoreflecttheaccrualofinterestforOctoberthroughDecember.BondsIssuedatFaceValueApril1,20X5BondsPayable100,000

Cash100,000April1from20X1to20X5InterestExpense2,000InterestPayable2,000

Cash4,000WhenthenextinterestpaymentdatearrivesonApril1,theactualinterestpaymentwillcoverthepreviouslyaccruedinterest,andadditionalamountspertainingtoJanuary,February,MarchandApril.BondsIssuedataDiscountBondsIssued

ataDiscount

BondsIssuedataDiscount

SupposeAndersonissues100of5-year,8%bondsat$92,278onJanuary1,20X0whenthemarketinterestrateis10%.TheinterestwillbepaidonJuly1andJanuary1ofeachyear.Andersonwillhavetorepayatotalof$140,000,whichconsistsofthe$4,000every6monthsforfiveyearsand$100,000atmaturity.BondsIssuedataDiscountAnderson$92,278＋$47,722

InvestorThis$47,722mustbespreadover10six-monthperiods.$140,000BondsIssuedataDiscountThus,the$4,000periodicinterestpaymentisincreasedby$772.20ofdiscountamortizationeachperiod.

Discount＝$10,000－$92,278

?Discount＝＝$7,722Thetotalcostisincreasedbythe$7,722discount.BondsIssuedataDiscountTheentryJan.1,20X0Cash$92,278DiscountonBondsPayable7,722BondsPayable$100,000BondsIssuedataDiscountJuly1andJanuary1eachyearInterestExpense4,772

DiscountonBondsPayable772

Cash4,000Dec.31,20X5BondsPayable100,000Cash10,000BondsIssuedatPremiumBondsIssued

at

PremiumBondsIssuedatPremium

SupposethatAndersonissues100ofthe5-year,8%

bondsat$108,530onFebruary1,20X1whenthemarketinterestrateis6%.TheinterestwillbepaidonJuly1andJanuary1ofeachyear.Andersonwillhavetorepayatotalof$140,000,whichconsistsofthe$4,000every6monthsforfiveyearsand$100,000atmaturity.BondsIssuedatPremiumAnderson$108,530＋

$31,470

Investor$140,000This$31,470mustbeexpensedover10six-monthperiods.BondsIssuedatPremiumPremium＝?Premium$108,530－$100,000＝＝$8,530

Totalborrowingcostisreducedbythe$8,530premium.Th