Bond Accounting

[pic 1]

LYONs DOCUMENT STORAGE cORPORATION

bOND aCCOUNTING

By:

Group 17

Ankita Susan Tigga – 0067/52

Ankur – 0068/52

Ankur Jain – 0069/52

Ashish Meena – 0070/52

QUESTION 1:

Part a:

Explain what is meant by the terms “premium” or “discount” as they relate to bonds.

Ans. The terms “premium” and “discount” refer to the difference of the bond price from the face value of the bond. Bonds which sell at a price greater than the face value are said to be at a premium and the bonds which sell at a price lesser than the face value are said to be at a discount.

“Premium” or “discount” is present due to the difference in the coupon rate and the yield.  Whenever the yield rate is greater than the coupon rate, the bond sells at discount, whereas if the coupon rate exceeds the yield rate, the bond sells at premium. A bond selling at par, i.e. neither premium nor discount will have yield equal to the coupon rate.

Part b:

Compute exactly how much the company received from its 8% bonds if the rate prevailing at the time of the original issue was 9%.

Ans. (The calculation has been demonstrated in the excel sheet)

To determine how much the company received from its 8% bonds at 9% yield rate, we first determine the bond price. Since Bond price is the net present value of its future cash flows, we determine:

Bond price (per bond issued) = [pic 2]

Bond price = $907.9921

Total bonds issued = 10,000

Total amount received after issuing bonds = 907.9921 * 10,000 = $9,079,921

Part c:

Re-compute the amounts shown in the balance sheet at December 31, 2006, and December 31, 2007, for Long-Term Debt.

As shown in the balance sheet,

For December 2006, Long term debt = $9,259,000

For December 2007, Long term debt = $9,292,000

For December 2006, no. of periods (6 months duration) left before bond maturity = 25

For December 2007, no. of periods (6 months duration) left before bond maturity = 23

To re-compute, we have

Long term debt for December 2006 = [] * 10,000 = $9,258,590[pic 3]

Long term debt for December 2007 = [] * 10,000 = $9,292,611[pic 4]

Part d:

What is the current market value of the bonds outstanding at the current effective interest rate of 6%?