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

2. Bond terms Face Value Coupon Rate Maturity Market Rate

3. Bond Example A company issues a $30,000 10-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.

4. Bond Example

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

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

7. Bond Prices How are they quoted?

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

9. Bond Prices

10. Market Rate > Coupon Rate A company issues a $30,000 10-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.

11. 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

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

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

14. Figuring Book Value Bonds Payable Discount on BP Interest Expense 30000 1500 900 75 75 30000 1425 975 Book value = 30,000 – 1,425 = 28,575

15. Market Rate < Coupon Rate A company issues a $30,000 10-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.

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

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

18. 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

19. Figuring Book Value Bonds Payable Premium on BP Interest Expense 30000 900 900 45 45 30000 855 855 Book value = 30,000 + 855 = 30,855

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