Bond Amortization Schedule

BONDS - 3/30/15

Bond amortization schedule (handout)

Bond Redemptions (Pay-offs)

1. Repay at maturity
2. Repurchase on open market before maturity

1. Not always easy to do
2. Many investors want to just hold bonds until maturity (unless there is a call feature)

1. If callable, repurchased at the call price

Callable Bonds (handout)

• Ex: callable at 102 → 102% of face value = $102,000
• Bonds called 4/1/14
• Bond issuance costs: originally $5,000

• LOSS
• Paid $102k when could have held to maturity and paid only $100k
• Callable bonds almost ALWAYS cause a loss for the issuer

• Not necessarily a bad thing, though, if bonds can be issued at a lower rate

Bond issuance costs - expenses incurred to prepare the bond indenture (contract)

• Lawyer fees, investment bank fee, etc.
• Lots of costs
• Issuer obtains benefit from issuing bonds: throughout life of bonds

How do you handle bond issuance costs?

• Expenses are capitalized as an asset and amortized over the life of the bonds

• As an expense
• Basically a “prepaid expense” (asset)

Convertible debt

• $1,000 convertible bond

• → 1 share common stock
• Date of issuance FV of stock = $600
• You hope that the FV of the stock increases in the future so that you can convert and make money

• 1 convertible bond → 4 shares of stock

• 2 for 1 stock split = 1 convertible bond → 8 shares of stock
• Whenever there is a stock split, must go back and adjust for things like convertible debt
• Conversion feature pre-stock split should = post-stock split conversion feature

PROBLEM 6:

Book method:

B/P         5,000

        Bond Discount $100

        C/S                $50 (5 bonds x 10 shares each @ $1 par)

        APIC, C/S        $4,850 ($4,900 - $50)

FV method: based on FV of stock, there would be a loss (but most companies use book method?)

B/P        5,000

Loss         600 → PLUG

        Bond Discount 100

        APIC, C/S         5,450 (50 shares x $110 FMV)

Owner equity goes up more (but NOT actually) → shifting it from RE to APIC

• So why use FV and take loss in order to get more APIC?
• Doesn’t seem very likely

Debt-Equity

Book Value → based on C/S

• Not much value to it if company is repurchasing shares of stock
• BV/share = take with grain of salt

-not always the best measurements of OPERATING companies^^ → (10:15 in lecture)

Ex: L-Brands

• Billions in market cap (book value)
• Negative owners’ equity, though

• Issued stock @ $1 per share
• Repurchase stock @ $100 per share
• Retire that stock (not treasury stock) → issue price must be reversed

• R/E         99
• C/S        1

• CASH         100

• Big deficit in RE → negative owner’s equity

Stock Warrants

• Fall into 1 of 2 categories:

1. Non-detachable → convertible bond

• Can’t detach warrant from bond
• Must turn the bonds in when you convert them to stock

• Also must normally pay some cash along with that
• Increase stock price to account for the cash paid as part of the conversion

• Account for them like convertible bonds
• Only records: DEBT

1. Detachable

• Record: debt (bonds) AND equity (warrants)
• Separate issue price into 2 pieces
• Only have to turn the warrant in with a detachable stock warrant (can still hold on to the bonds) → left with bonds and stock

PROBLEM 7:

a)

Cash                 1,040

Discount on BP      60

Bonds Payable        1,000 → allocated $940 to bonds (because 100 allocated to warrants) = $60 assumed discount