Account for retired bonds w/premiums(or discounts)?
There is a loss because the company discharged a $115k obligation for more than 115k. the loss is $2,000. The premium is added to cash because it is part of the bond proceeds. When the bonds are sold at a premium, it means the cost of borrowing is less than the coupon rate on the bonds. The lenders (bondholders) get the premium back as cash, but the borrower is amortizing the premium so that the amount of cash paid is more than the amount of interest expense reported. Over the life of the bonds the difference between the interest expense and the cash paid is equal to the premium, so that at the time of bond maturity, the borrowers pays only the face amount of the bond. Yes when you issue a bond at a discount, your interest expense is actually higher than the stated interest on the bonds. The cash paid for interest is the amount of stated interest, but when the bond matures, you have to repay the full face value, so the difference between the face value and the proceeds is an extra cost. It is recorded as interest expense by amortizing the discount with each interest payment instead of waiting to the maturity date to record. amortization ensures that tthe interest expense is better matched with revenue, which would not be the case if it were all lumped into the maturity year. Because premium or interest is amortized, which ensures the correct amount of interest expense recorded each year, the book value of the bond changes each year. If the bonds are retired for some amount more or less than book value, a loss or gain has to be recorded. Any time you pay $10 to retire a debt of $8, you lose $2. If you retire an $8 debt for $7, you are a dollar ahead. It's that simple.
Would it be logical to invest in (discount) bonds, and in case, they trade at a premium, then sell them? Else, hold on to them until they mature?
Yes, it’s certainly logical.But here’s the thing: it’s no more or less logical than buying premium bonds with the hope or expectation that the premium will get larger.In fact, that very thing happened to most people who bought a newly issued, high-quality bond between 1980 and 2016. The duration of the current bull market in stocks is nothing, compared to the multigenerational bull market in bonds, where interest rates went nowhere but down, for 36 years.Conversely, since 2016, most people who bought a newly issued, high-quality bonds have seen their price drop to a discount….and then drop to a deeper discount.It is certainly true that institutions and professional money managers actively trade bond with the intent of profiting in the manner you describe. But they are doing business in huge volume and the prices they get are far better than you or I could hope to see. Their scale and breadth of holdings enable them to profit from small spreads you will never see, and market inefficiencies and strategies that most people would struggle to understand, let alone master.The bottom line, however, is this: like any other money managers, they can’t make a silk purse out of a sow’s ear. As long as they are obliged to stay within a limited category of bond type and duration, the best they can do is make a nicer porky purse than you can.If you hope to achieve excess profits in bonds, buy a high yield, total return or multisector fund. But the best you and I can do with conservative, garden-variety bonds is to take a low risk, predictable return and screw it up.Hope this helps.
Issuing bonds at a discount question?
First of all, since the coupon rate is higher than the market rate, the bonds will be issued at a premium, not a discount. 1. Determine the present value of the bonds. The present value of the face value of the bonds (88,000) discounted back 10 years (20 periods) at a 10% discount rate is $33,166.27. The present value of the 20 payments of 5,280 (88,000 x 6%) discounted back 10 years at a 10% discount rate is $65,800.47 Total present value is $98,967 (Rounded) 2. Journalize the issuance of the bonds and the first semi-annual interest payment. The company amortizes bond premium and discount by the straight-line method. Explanations are not required. You may use t-accounts in place of formal journal entries if you wish, just be sure to label the amounts appropriately. Dr Cash 98,967 Cr Bonds Payable 88,000 Cr Premium on Bonds Payable 10,967 Dr Interest Expense 4,732 Dr Premium on Bonds Payable 548 Cr Cash 5,280 3. Zanker has the option to issue common stock rather than bonds. What are the advantages and disadvantages of issuing bonds and of issuing common stock to raise the needed cash? I'll let you draw your own conclusions.
What is unwinding of discount? What are some examples?
Unwinding of discount is adding the interest element (time value of money ) to an amount discounted to present value , which is payable in future, to build up the cost till the date of repayment.For example 500,000 after 5 years, if discounted to present value will be shown at a discount rate of 10% at 310460 presented as liability today.This liability will be increased to 341506 (310460+31046) by adding interest element 31046 (10%*310460) or also known as unwinding the discount, since we are applying it to an already discounted amount.
The bonds payable account has a balance of $600,000 and the discount on bonds payable account has a balanc?
The bonds payable account has a balance of $600,000 and the discount on bonds payable account has a balance of $40,000. What is the carrying amount of the bonds?
Financial Accting-How to determine discount rate for bonds?
The entire premise behind selling/buying bonds at a premium or discount is that people will be unwilling to pay face value for a bond that does not bear as much interest as the standard market rate of interest. (discount) Also, people are willing to pay more for a bond that yields more then the current market rate of interest. (premium) The discount will be the difference between the market value of the bond and the face value of the bond. This will either be stated or you will have to figure it out via the difference in interest rates. The journal entry to follow will also depend on if you are using straight line or effective interest methods of amortization. Straight Line Method: So if market interest rate was 12% and coupon rate was 10%, then there should be a 2% discount; [2,000,000 x .98 = 1,960,000] At sale date: State of California DB Cash 1,960,000 CR Bonds Payable 1,960,000. The discount [40,000] will now be amortized over the term that the bonds are outstanding [DB Bond Interest Expense CR Bonds Payable]; regular coupon interest payments will be recognized on their respective dates [CR Cash DB Interest Expense] Your amortization entry will be [40,000/10 = 4000] *Effective interest rate methods vary
What discount rate do you use in your DCF valuation?
The WACC is a required component of a DCF valuation. Simplistically, a company has two primary sources of capital: (1) debt and (2) equity. The WACC is the weighted average of the expected returns required by the providers of these two capital sources. Note that the discount rate must match the intended recipients of the projected cash flows in the DCF. That is, if the cash flows are intended for all capital holders, the WACC is the appropriate discount rate. However, the cost of equity is the appropriate discount rate if cash flows to equity holders are projected.In addition to being a critical input for a business valuation, the WACC serves as a basis of comparison to the return on invested capital (ROIC) of the business. A company generates value through growth if the ROIC exceeds the WACC, but destroys value if ROIC is below the WACC. This analysis can be used by management to focus its attention on profitability or growth to increase enterprise value.Mathematically, the required return of each source of funding is multiplied by its respective weight in the company’s capital structure. The sum of the weighted components equals the WACC. The formula for WACC is as follows:To learn more about how to calculate discount rates for privately-held companies, read more at the Toptal Finance Blog here.
How do we determine the discount rate in a bond valuation problem?
I’m presuming you know the calculation for the present value of cash flow in writing this answer. If you need that calculation, I’ve pasted it below.In order to solve for the discount rate used, we need the current price of the bond as well as the coupon, maturity and how often the coupon is paid per year.The current price of a bond is THE PRESENT VALUE OF ALL FUTURE EXPECTED CASH FLOWS.The calculation on the left shows the PV of a single coupon flow. For your purposes, you’d map out all of the cash flows of the bond in which you’re interested. taking all of the known variables: the price of the bond (PV), the future value of the interest flow (FV) and the time (-n) until that coupon payment. Don’ forget to add your final cash flow at the end for the return of principal. you’re looking to solve for (1+i).once you’ve mapped the known variables you can solve for the discount factor which would equal the current price of the bond. This is easily done in a spreadsheet. once you’ve mapped your cash flows, use goal seek to iterate for the discount rate. Goal seek will ask you what variable you want to change and which variable to use to calculate the discount rate,’you want to change the interest rate (1+i), keeping the price of the bond (PV) constant.I hope this information is helpful and you enjoy the rest of your evening.
Help accounting AE10-20?
(a) The issuance of the bonds. Dr Cash 668,886 Dr Discount on Bonds Payable 48,114 Cr Bonds Payable 717,000 (b) The accrual of interest and the discount amortization on December 31, 2010. 668,886 carrying value of bonds x 8% market rate = $53,511 interest expense 717,000 x 7% = 50,190 cash interest payable 53,511 - 50,190 = 3,321 discount amortization Dr Bond Interest Expense 53,511 Cr Interest Payable 50,190 Cr Discount on Bonds Payable 3,321 (c) The payment of interest on January 1, 2011. Dr Interest Payable 50,190 Cr Cash 50,190