bus 214 D, 10, 11

the bond price is quoted as a

% of face value or par value i.e. 965 = 96.5% x 1000

two different cash flows over the life of a bond

1. periodic interest payments 2. face or par value of the bond that will be paid back at maturity

a bond is

a formal promise by the issuer to make specified future payments over the life of a bond. these usually consist of periodic interest payments and repayment of the face amount (principal amount or par value) at maturity.

The rate of return can be manipulated by

adjusting the market price, which directly effects the effective rate of retun

bonds and long-term notes

are a form of debt financing which firms use to provide relatively large and long-term sources of capital for carrying on the business of the firm

since bond prices are determined by discounting the bonds' future cash flows by the market rate of interest,

bond prices and interest rates move in opposite directions

If the market rate of interest is higher than the stated rate of interest,

bonds will sell at a discount, less than face amount

junk bonds

carry a substantially higher rate of interest than do investment grade corporate bonds due to their financial riskiness

All liabilities on the balance sheet should theoretically be valued at their ________.

discounted present value the one exception is deferred income taxes

the difference between amount borrowed (or invested) and the amount repaid (or collected) is commonly known as

interest

There is a positive interest rate between risk and

interest rates. the riskier the debt security, the higher the interest rate investors will demand for investing in the bond and taking on the risk

compound interest

involves situations where unpaid past interest is added to the old principal to obtain a new principal value. thus, interest is computed on the original principal plus all unpaid interest (except in the case of short-term notes where we deal mostly with compounded interest situations in accounting and finance)

present value is based on

length of time until the amount is recieved the interest rate the dollar amount to be recieved

bond prices depend on the

market interest rate, the rate used to discount the future of cash flows associated with each individual bond

most corporate bonds are made _____.

semiannually

how to calculate interest payment on bond

stated rate of interest x face amount of bond

future value

the amount to which an account will grow to at some specified time when interest is compounded

If the market rate is lower than the stated rate,

the bonds will sell at a premium, higher than face amount

If the market rate is equal to the stated rate,

the bonds will sell at face (par) value.

present value

the current worth of something today. since money has a time value due to its ability to earn a rate of return though investment, the PV of a given cash flow (payment) will always be less than the actual number of dollars transacted in the future. i.e. PV of $1 to be recieved at the end of one period, discounted at 10% is equal to $.909

determining bond prices, computing the price of a bond involves nothing more than computing _______________ that the investor will recieve from the bond investment

the present value of the cash flows

compounding refers to

the process of determining future values

discounting refers to

the process of determining present value