Issuance of Bonds Payable Facts 1) In theory bonds should sell for the present value of the future cash inflows. 2) Bonds pay interest usually semi-annually. The interest rate stated on the bond may not be the current market rate of interest. 3) Each bond has a maturity date usually 5-20 years after issuance. 4) Thus bonds have cash inflows as follows: The interest stream PVA The face value of the bond at maturity PV of 1$ or LS M = mutiplier (appendix A) n = number of payments = market (effective) interest rate The bond's presumed sales price would then be: Problem 1 Bond 2,000,000 Stated (Annual) Interest Rate 10% Bond Tern 10 Years Market Interest Rate 8% Semi-Annual 1) The PVA of the interest stream (Appendix A-4): 20 payments of Tables n= ME 13.59033 PVA 2) The PV($1) of th bond face amount (principal)(Appendix A-3): M= 0.45639 Using Using Excel *M PV *M NPV 0 0 Debit Credit Cash Bond Premium Bond Payable (2,000,000) 2,000,000 Interest Expense = Bond Carrying Value * Effective Interest for Period Bond Carrying Value = Bond Payable + Bond Premium or - Bond Discount Bond Payable Bond Premium 2,000,000 bb bb (2,000,000) (2,000,000) 100,000