1. Sessions 11 & 12A&MIS 5211 Bonds & Notes Payable William F. Bentz Accounting & MIS

2. Sessions 11 & 12A&MIS 521A&MIS 5212 Bond & Interest Terms - 1 v A bond is a contractual agreement to pay a stated amount in the future, plus periodic interest payments, in exchange for the current receipt of cash to be used for specified purposes. v A note is a similar agreement that usually involves a loan from an institution such as a bank.

3. Sessions 11 & 12A&MIS 521A&MIS 5213 Time-Line of Cash Flows T=0T=1T=2T=3T=4T=5T=6T=7T=8T=9T=10 C PV $55,551.36($100,000) 1 Jan 98 31 Dec 05 8 Years

4. Sessions 11 & 12A&MIS 521A&MIS 5214 Bond & Interest Terms - 2 vBond issues usually involve many lenders, both individual and institutional. Bonds may be traded publicly or placed privately. vNotes tend to involve from fewer lenders--usually institutions--than do bonds.

5. Sessions 11 & 12A&MIS 521A&MIS 5215 Bond & Interest Terms - 3 vBy convention, the amount to be repaid upon the maturity of a bond or note is called the par or stated value. vBy convention, interest rates are listed as annual rates unless stated otherwise.

6. Sessions 11 & 12A&MIS 521A&MIS 5216 Bond & Interest Terms - 4 vBy convention, the interest rate used to determine the interest to be paid each interest period is the coupon or stated rate. vThe “proceeds” from a bond issue or other loan is the net amount of cash received by the borrower.

7. Sessions 11 & 12A&MIS 521A&MIS 5217 Bond & Interest Terms - 5 vProceeds = [par value of bonds x bond price divided by 100] + accrued interest payable =present value of all the cash payments to lenders discounted at the effective yield rate vAccrued interest payable = the interest payment times the fraction of one interest period since the last interest payment

8. Sessions 11 & 12A&MIS 521A&MIS 5218 Bond & Interest Terms - 6 vBond prices are per $100 of par value. vA price of 98 for a $10,000 bond implies a total price of $9,800 vEach interest payment = [annual coupon rate x par value of the bonds] / the number of payments per year.

9. Sessions 11 & 12A&MIS 521A&MIS 5219 Bond & Interest Terms - 7 vExample: Assume a $1,000 bond pays interest of 10% in semiannual payments. vTotal interest payment per year = $100 [10% x $1,000] vPer semiannual interest period, the interest payment is $50 [$100/2]

10. Sessions 11 & 12A&MIS 521A&MIS 52110 Bond and Interest Terms - 8 vInterest expense (income) = effective periodic rate x beginning net book value of the liability vDiscount (premium) amortization = interest expense (income) - interest payment

11. Sessions 11 & 12A&MIS 521A&MIS 52111 Consider Zero Coupon Bonds vZero coupon bonds make no interest payments. vThe amount to be paid upon maturity represents both principal and interest.

12. Sessions 11 & 12A&MIS 521A&MIS 52112 M. Chang & Associates

13. Sessions 11 & 12A&MIS 521A&MIS 52113 M. Chang & Assoc.. - Info.

14. Sessions 11 & 12A&MIS 521A&MIS 52114 M. Chang & Assoc.. - GJ 01/01/1998Cash55,551.36 Discount on Notes Payable 44,448.64 Notes Payable100,000.00 12/31/1998Interest Expense4,235.79 Discount on Notes Payable 4,235.79 12/31/1998Retained Earnings4,235.79 Interest Expense4,235.79 12/31/1999Interest Expense4,558.77 Discount on Notes Payable4,558.77 12/31/1999Retained Earnings4,558.77 Interest Expense4,558.77

15. Sessions 11 & 12A&MIS 521A&MIS 52115 M. Chang & Assoc.. - GJ 12/31/2000Interest Expense4,906.38 Discount on Notes Payable4,906.38 12/31/2000Retained Earnings4,906.38 Interest Expense4,906.38 12/31/2001Interest Expense5,280.49 Discount on Notes Payable5,280.49 12/31/2001Retained Earnings5,280.49 Interest Expense5,280.49

16. Sessions 11 & 12A&MIS 521A&MIS 52116 M. Chang & Assoc.. - GJ 12/31/2002Interest Expense5,683.12 Discount on Notes Payable5,683.12 12/31/2002Retained Earnings5,683.12 Interest Expense5,683.12 12/31/2003Interest Expense6,116.46 Discount on Notes Payable6,116.46 12/31/2003Retained Earnings6,116.46 Interest Expense6,116.46

17. Sessions 11 & 12A&MIS 521A&MIS 52117 M. Chang & Associates - GJ 12/31/2004Interest Expense6,582.84 Discount on Notes Payable 6,582.84 12/31/2004Retained Earnings6,582.84 Interest Expense 6,582.84 12/31/2005Interest Expense7,084.78 Discount on Notes Payable 7,084.78 12/31/2005Notes Payable100,000.00 Cash100,000.00 12/31/2005Retained Earnings7,084.78 Interest Expense 7,084.78

18. Sessions 11 & 12A&MIS 521A&MIS 52118 M. Chang Interest Expense

19. Sessions 11 & 12A&MIS 521A&MIS 52119 M. Chang Ending Liability