From page 9-3 of the VLN, when determining the issue price of a bond, which interest rate would you use? Group of answer choices A. Stated rate B. Market rate C. Nominal rate D. Compound rate
From page 9-3 of the VLN, when determining the issue price of a bond, which interest rate would you use? Group of answer choices A. Stated rate B. Market rate C. Nominal rate D. Compound rate
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
Related questions
Concept explainers
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Question
From page 9-3 of the VLN, when determining the issue price of a bond, which interest rate would you use?
Group of answer choices
A. Stated rate
B. Market rate
C. Nominal rate
D. Compound rate
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).
![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](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fc9d06b09-34b2-4a0b-b1fb-2ba46d6a9f5a%2Fd6a74c2c-15c3-47bf-97f5-b284ad57aea9%2Ft5jx0k_processed.jpeg&w=3840&q=75)
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
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