University:
Widener University
Course:
COMPSCI 345 | Practice and Applications of Data Management
Academic year:

2023
Views:

40

Pages:

3
Author:

Nicole Jarvis

Long-Term Debt RECITATION AGENDA Long-Term Debt Agenda • Long-Term Debt (Bonds) Terminology Balance Sheet Equation Effects Sample Problems o Calculate the interest expense, net book value of bonds, par value and market interest rate using available information o Retirement of bonds o Zero-coupon bonds Long-Term Debt LONG-TERM LIABILITIES – LONG-TERM DEBT Terminology Par Value: stated or face value of the bond; the amount due at maturity Coupon Rate: the rate used to determine the periodic cash payments, if any. (Also called the “Stated Rate” in the book.) This rate is stated as the annual amount. Current Market Interest Rate: the rate used to determine the current market value of the bond. It is based on market conditions and risk characteristics of the borrower. Market Rate of interest at issuance: the rate used to determine the proceeds received by the firm when the bond is issued. This rate is also used to determined interest expense. (Also called the “Effective Rate” in the book.) Coupon Payment: Cash Interest Payment = Par Value x Coupon Rate Interest Expense: Interest Expense = Book value of bond x Market Interest Rate at issuance Zero-Coupon Bond: Bond with Coupon Rate of 0% Bonds - Par/Discount/Premium (Be sure you understand bonds sold at Par, and Zero-Coupon Bonds.) Bond Sells Market Rate at issuance Market Value at issuance At Par = Coupon Rate = Par Value = Interest Expense At a Discount > Coupon Rate < Par Value < Interest Expense At a Premium < Coupon Rate > Par Value > Interest Expense Coupon Payment Long-Term Debt Long-Term Debt - Balance Sheet Equation If bond is sold At Par (Note: Market Value = Par Value, Coupon Payment = Interest Expense) Date Issue 6 mo. 1 yr. … Maturity Assets = Liabilities + S. E. Cash Bond Payable Premium (Discount) Retained Earnings Market Value Par Value (Coupon Payment) (Interest Expense) (Coupon Payment) (Interest Expense) (Par Value) (Par Value) If bond is Zero-Coupon (special case of bonds sold At Discount) Assets = Liabilities + S. E. Date Cash Bond Payable Premium (Discount) Retained Earnings Issue Market Value Par Value (Discount)a 6 mo. Discount Accrualc (Interest Expense)b 1 yr. Discount Accrualc (Interest Expense)b … Maturity (Par Value) (Par Value) a Discount = Par Value - Market Value b Interest Expense = Net Bond Liability x Market Rate of interest at issuance = (Bond Payable + Premium (Discount) Balance) x Market Rate of interest at issuance c Discount Accrual = Interest Expense (only for Zero-coupon bonds)