Examples of zero-coupon bond in the following topics:
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- The value of a zero-coupon bond equals the present value of its face value discounted by the bond's contract rate.
- A zero-coupon bond with requires repayment of $100,000 in 3 years.
- A zero-coupon bond is one that does not pay interest over the term of the bond.
- Zero-Coupon Bond Value = Face Value of Bond / (1+ interest Rate)
- It is important when completing the zero-coupon bond calculation to ensure the time period and term of the bond are expressed in similar terms.
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- The journal entry to record the retirement of a bond: Debit Bonds Payable & Credit Cash.
- A maturity date is the date when the bond issuer must pay off the bond.
- Bonds can be classified to coupon bonds and zero coupon bonds.
- For coupon bonds, the bond issuer is supposed to pay both the par value of the bond and the last coupon payment at maturity.
- In case of a zero coupon bond, only the amount of par value is paid when the bond is redeemed at maturity.
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- Coupon bonds carry detachable coupons for the interest they pay.
- These have a coupon that remains constant throughout the life of the bond.
- A variation is stepped-coupon bonds, whose coupon increases during the life of the bond.
- Also known as FRNs or floaters, these have a variable coupon that is linked to a reference rate of interest, such as LIBOR or Euribor.
- Zeros pay no regular interest.
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- A bond's book value is affected by its term, face value, coupon rate, and discount rate.
- Note that the trading value of a bond (its market price) can vary from its face value depending on differences between the coupon and market interest rates.
- A bond's coupon is the interest rate that the business must pay on the bond's face value.
- As a result, the interest that is paid to the bond holder fluctuates over time with an indexed coupon rate.
- Explain how a bond's value is affected by its term, face value, coupon and discount rate
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- A bond's value is measured by its sale price, but a business can estimate a bond's price before issuance by calculating its present value.
- The bond's contract rate is another term for the bond's coupon rate.
- If the market rate is greater than the coupon rate, the bonds will probably be sold for an amount less than the bonds' face value and the business will have to report a "bond discount. " The value of the bond discount will be the difference between what the bonds' face value and what the business received when it sold the bonds.
- If the market rate is less than the coupon rate, the bonds will probably be sold for an amount greater than the bonds' value.
- If the market and coupon rates differ, the issuing company must calculate the present value of the bond to determine what price to charge when it sells the security on the open market.
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- In finance, bonds are a form of debt: the creditor is the bond holder, the debtor is the bond issuer, and the interest is the coupon.
- A bond is a debt security under which the bond issuer owes the bond holder a debt including interest or coupon payments and or a future repayment of the principal on the maturity date.
- Interest on bonds, or coupon payments, are normally payable in fixed intervals, such as semiannually, annually, or monthly.
- The coupon is the interest rate that the issuer pays to the bond holders.
- It can also refer to the yield to maturity or redemption yield, which is a more useful measure of the return of the bond, taking into account the current market price, and the amount and timing of all remaining coupon payments and of the repayment due on maturity.
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- On issuance, the journal entry to record the bond is a debit to cash and a credit to bonds payable.
- Also, the bondholders may sell their bonds to other investors any time prior to the bonds maturity.
- Bonds can sell for less than their face value, for example a bond price of 75 means that the bond is selling for 75% of its par (face value).
- If a bond has a coupon interest rate that is higher than the market interest rate it is considered a premium.
- Bonds are considered issued at a discount when the coupon interest rate is below the market interest rate.That means a company selling bonds at a discount rate receive less than the face value of the bond in the sale.
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- Journal entries are required to record initial value and subsequent interest expense as the issuer pays coupon payments to the bondholder.
- Bonds derive their value primarily from two promises made by the borrower to the lender or bondholder.
- Example of bonds issued at face value on an interest date:-
- On 2010 December 31, Valley issued 10-year, 12% yield bonds with a USD 100,000 face value, for USD 100,000.
- Summarize how a company would record the original issue of the bond and the subsequent interest payments
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- When a bond is sold at a premium, the difference between the sales price and face value of the bond must be amortized over the bond's term.
- This bond sells for $110,000.
- When a bond is issued at a premium, that means that the bond is sold for an amount greater than the bond's face value.
- The difference between the cash from the bond sale and the face value of the bond must be credited to a bond premium account.
- When all the final journal entries are made, the bond premium and bond payable account must equal zero.
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- When a business sells a bond at a discount, it must record a discount balance in its records and amortize that amount over the bond's term.
- When a bond is sold at a discount, the market rate of the bond exceeds the contract rate.
- When a bond is sold, the company records a liability by crediting the "bonds payable" account for the bond's total face value.
- At this time, the discount on bond payable and bond payable accounts must be zeroed out, and all cash payments must be recorded.
- A bond's discount amount must be amortized over the term of the bond.