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From page 9-3 of the VLN, what are the cash flows from a bond that must be present valued back to today? Group of answer choices A. The face amount only B. The interest payments only C. The issue price only D. The face amount and interest payments

From page 9-3 of the VLN, what are the cash flows from a bond that must be present valued back to today? Group of answer choices A. The face amount only B. The interest payments only C. The issue price only D. The face amount and interest payments

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 9-3 of the VLN, what are the cash flows from a bond that must be present valued back to today? Group of answer choices A. The face amount only B. The interest payments only C. The issue price only D. The face amount and interest payments
Bonds can be issued (sold) for more or less than their face value. Sells at Face Amount (100%): Bond Premium (>100%): Bond Discount (<100%): Determining the Issue Price of a Bond 1. Identify the two cash flows provided by the bond (Face value-a single sum AND Interest payments [face x stated rate or if semiannual then face x % stated rate]-an annuity). 2. Compare the market rate with the stated rate to determine if bond will sell at face, premium or discount. If at face then no more calculations are needed. 3. Eliminate the stated rate, you don't need it anymore as you already know the cash flows from the bond. 4. Use the market rate and compounding periods to determine the correct factor to present value the cash flows. Practice ABC Corporation wants to issue five-year $1,000 bonds 10% stated rate paying semi-annual interest. Market rate of interest is 8%; (therefore, semiannual would be 5% stated rate and 4% market rate respectively). What is the bond issue price on January 1, 20XA? Calculate the issue price of the bond: CASH FLOW X PV FACTOR (use market rate) = Present Value Present Value of Principal (Face) Present Value of Interest Payment (Face x stated) Issue price (sales price) OR with the TI BAII Plus Calculator PMT СРТ PV IY FV The issue price: Calculate the difference: Bond issue price Bond face amount Difference Record the bond issuance on January 1, 20XA
Transcribed Image Text:Bonds can be issued (sold) for more or less than their face value. Sells at Face Amount (100%): Bond Premium (>100%): Bond Discount (<100%): Determining the Issue Price of a Bond 1. Identify the two cash flows provided by the bond (Face value-a single sum AND Interest payments [face x stated rate or if semiannual then face x % stated rate]-an annuity). 2. Compare the market rate with the stated rate to determine if bond will sell at face, premium or discount. If at face then no more calculations are needed. 3. Eliminate the stated rate, you don't need it anymore as you already know the cash flows from the bond. 4. Use the market rate and compounding periods to determine the correct factor to present value the cash flows. Practice ABC Corporation wants to issue five-year $1,000 bonds 10% stated rate paying semi-annual interest. Market rate of interest is 8%; (therefore, semiannual would be 5% stated rate and 4% market rate respectively). What is the bond issue price on January 1, 20XA? Calculate the issue price of the bond: CASH FLOW X PV FACTOR (use market rate) = Present Value Present Value of Principal (Face) Present Value of Interest Payment (Face x stated) Issue price (sales price) OR with the TI BAII Plus Calculator PMT СРТ PV IY FV The issue price: Calculate the difference: Bond issue price Bond face amount Difference Record the bond issuance on January 1, 20XA
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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