Principles of Financial Accounting · free preview
The Pricing of Long-Term Liabilities
Long-term liabilities are priced by present value, discounting the promised interest and principal payments at the market rate, so the liability is recorded at proceeds received, which equals face value only when the stated rate matches the market rate.
1. A bond as a promise stream
A bond as a promise stream
2. Discount, par, and premium
Discount, par, and premium
3. Recording the proceeds
Recording the proceeds
4. Why pricing matters beyond bonds
Why pricing matters beyond bonds
5. What buyers pay for
What determines the price investors pay for a bond?
6. Stated versus market rate
A bond carries an 8 percent stated rate, but similar bonds yield 10 percent. At what price does it issue?
7. Discount account nature
How does a discount on bonds payable appear in the accounts?
8. Par issuance condition
When does a bond issue at exactly face value?
9. Coupon amount
A 1,000,000 dollar bond pays 8 percent interest annually. Compute the yearly cash interest in dollars, number only.
10. Discount direction of carrying value
A bond issued at a discount has a carrying value below face at issuance. As amortization proceeds, carrying value moves toward face, which means it ____ over the bond's life. One word.
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