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2 of the VLN, how do you determine the annuity cash flow (the bond interest payment) from an annual bond? Group of answer choices A. Bond payable x stated rate B. Bond liability x stated rate C. Bond payable x market rate D. Bond liability x market rate

2 of the VLN, how do you determine the annuity cash flow (the bond interest payment) from an annual bond? Group of answer choices A. Bond payable x stated rate B. Bond liability x stated rate C. Bond payable x market rate D. Bond liability x market rate

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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From page 9-2 of the VLN, how do you determine the annuity cash flow (the bond interest payment) from an annual bond? Group of answer choices A. Bond payable x stated rate B. Bond liability x stated rate C. Bond payable x market rate D. Bond liability x market rate
Part A: Long Term Debt Anancing Altematives Debt versus Equity Interest versus dividends Capital structure Financial leverage Types of Long Term Debt 1. Notes Payable or Installment Notes 2. Leases 3. Bonds Installment Notes Recurring payments (installments) Once all payments are made the debt is extinguished Installment payments (includes both principal (decrease in carrying value) and interest) Practice: Loan Amortization schedule: You purchased a car for $22,999.79 (tax, tag, title) and agreed to make monthly payments of $370.41 for 6 years (72 months). Annual interest rate 5% (monthly 0.41667%) Time Cash Payment Interest expense @ Decrease in Carrying Value .0041667 Carrying Value Today 1" payment 2nd payment 3rd payment 4th payment 5th payment $22,999.79 22,725.21 22,449.49 22,172.62 21,894.60 $274.58 $370.41 370.41 370.41 $95.83 94.69 275.72 93.54 276.87 370.41 92.39 278.02 370.41 6-71 本本 ** ** ** payments 368.87 ** ** ** 72nd payment 370.41 1.54 368.87 You are getting ready to make your 5th car payment. Determine your interest expense, decrease in carrying value and new debt balance after the payment has been made. Interest expense: Decrease in Carry value: New Carrying value:
Transcribed Image Text:Part A: Long Term Debt Anancing Altematives Debt versus Equity Interest versus dividends Capital structure Financial leverage Types of Long Term Debt 1. Notes Payable or Installment Notes 2. Leases 3. Bonds Installment Notes Recurring payments (installments) Once all payments are made the debt is extinguished Installment payments (includes both principal (decrease in carrying value) and interest) Practice: Loan Amortization schedule: You purchased a car for $22,999.79 (tax, tag, title) and agreed to make monthly payments of $370.41 for 6 years (72 months). Annual interest rate 5% (monthly 0.41667%) Time Cash Payment Interest expense @ Decrease in Carrying Value .0041667 Carrying Value Today 1" payment 2nd payment 3rd payment 4th payment 5th payment $22,999.79 22,725.21 22,449.49 22,172.62 21,894.60 $274.58 $370.41 370.41 370.41 $95.83 94.69 275.72 93.54 276.87 370.41 92.39 278.02 370.41 6-71 本本 ** ** ** payments 368.87 ** ** ** 72nd payment 370.41 1.54 368.87 You are getting ready to make your 5th car payment. Determine your interest expense, decrease in carrying value and new debt balance after the payment has been made. Interest expense: Decrease in Carry value: New Carrying value:
Leases A lease provides the lessee (user) the right to use an asset for a specified period of time. BONDS What are Bonds and why do corporations issue them? TERMS (pay close attention to terminology): Face value (aka bond payable, bond principal, or maturity value) is the contract amount and is a future cash flow the company will pay at maturity. Bond Liability (aka bond carrying amount) the liability on the balance sheet related to the bond and is made up of bond payable + bond premium or bond payable-bond discount. Stated rate (aka contract rate) the rate promised by the issuer. It is the rate used to calculate the interest paymént. (Bond payable x stated rate = annual interest payment, a cash flow) ABC Corporation $1,000 10% interest Interest payable June 30 and December 31 Matures December 31, 20XE 5 year bond +Following are the cash flows provided by the above bond ($1,000 face, 10% semi-annual interest) $1000 $50 $50 $50 $50 $50 $50 $50 $50 $50 $50 1 4 8. 9. 10 Market rate (aka, effective interest rate) the true interest rate yielded by the bond 1. The market rate is used to calculate the bond issue price; and it is used to calculate bond interest expense (bond liability x market rate annual interest expense). 2. Parts B & C: BOND PRICING and RECORDING We will use the present value concepts to determine the issue price of the bonds (Present value tables from Module 8 in Canvas; or use your TI BAII Plus Financial Calculator).
Transcribed Image Text:Leases A lease provides the lessee (user) the right to use an asset for a specified period of time. BONDS What are Bonds and why do corporations issue them? TERMS (pay close attention to terminology): Face value (aka bond payable, bond principal, or maturity value) is the contract amount and is a future cash flow the company will pay at maturity. Bond Liability (aka bond carrying amount) the liability on the balance sheet related to the bond and is made up of bond payable + bond premium or bond payable-bond discount. Stated rate (aka contract rate) the rate promised by the issuer. It is the rate used to calculate the interest paymént. (Bond payable x stated rate = annual interest payment, a cash flow) ABC Corporation $1,000 10% interest Interest payable June 30 and December 31 Matures December 31, 20XE 5 year bond +Following are the cash flows provided by the above bond ($1,000 face, 10% semi-annual interest) $1000 $50 $50 $50 $50 $50 $50 $50 $50 $50 $50 1 4 8. 9. 10 Market rate (aka, effective interest rate) the true interest rate yielded by the bond 1. The market rate is used to calculate the bond issue price; and it is used to calculate bond interest expense (bond liability x market rate annual interest expense). 2. Parts B & C: BOND PRICING and RECORDING We will use the present value concepts to determine the issue price of the bonds (Present value tables from Module 8 in Canvas; or use your TI BAII Plus Financial Calculator).
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