How Bonds Work Georgia CTAE Resource Network Instructional Resources Office Written by: Dr. Marilynn K. Skinner May 2009.

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Presentation transcript:

How Bonds Work Georgia CTAE Resource Network Instructional Resources Office Written by: Dr. Marilynn K. Skinner May 2009

Bond terms Face Value Coupon Rate Maturity Market Rate

Bond Example A company issues a $30, year bond with a 6% coupon rate. Each year, the owner receives $1,800 (6% of $30,000), paid in two semiannual installments of $900.

Bond Example

Journal Entry – Sale of Bonds at Face Value DateDescriptionDebitCredit Jan. 2Cash30,000 Bonds Payable30,000

Journal Entry – Payment of Bond Interest DateDescriptionDebitCredit July 1Bond Interest Expense900 Cash900

Bond Prices How are they quoted?

Bond Prices How are they quoted? As a percentage of face value!

Bond Prices

Market Rate > Coupon Rate A company issues a $30, year bond with a 6% coupon rate. Each year, the owner receives $1,800 (6% of $30,000), paid in two semiannual installments of $900. Bond sells at 95.

Journal Entry – Sale of Bonds at 95 DateDescriptionDebitCredit Jan. 2Cash28,500 Discount on Bonds Payable 1,500 Bonds Payable30,000 Book Value at Sale = 28,500

Journal Entry – Payment of Bond Interest DateDescriptionDebitCredit July 1Bond Interest Expense900 Cash900

Journal Entry – Amortization of Discount DateDescriptionDebitCredit July 1Bond Interest Expense900 Cash900 July 1Bond Interest Expense75 Discount on Bonds Payable75 (1500/10years)/2

Figuring Book Value Bonds Payable Discount on BP Interest Expense Book value = 30,000 – 1,425 = 28,575

Market Rate < Coupon Rate A company issues a $30, year bond with a 6% coupon rate. Each year, the owner receives $1,800 (6% of $30,000), paid in two semiannual installments of $900. Bond sells at 103.

Journal Entry – Sale of Bonds at 103 DateDescriptionDebitCredit Jan. 2Cash30900 Bonds Payable30,000 Premium on Bonds Payable 900 Book Value at Sale 30,900

Journal Entry – Payment of Bond Interest DateDescriptionDebitCredit July 1Bond Interest Expense900 Cash900

Journal Entry – Amortization of Discount DateDescriptionDebitCredit July 1Bond Interest Expense900 Cash900 July 1Premium on Bond Payable 45 Bond Interest Expense 45 (900/10 years)/2

Figuring Book Value Bonds Payable Premium on BP Interest Expense Book value = 30, = 30,855

Review Terms Bond Face Value Coupon Rate Maturity Market Rate Bond prices Book Value