CFA Level 1 - Liabilities
We will now discuss the journal entries and accounting impact of bonds issued at par, a premium, or a discount.
The market value of a bond is calculated as follows:
Formula 9.1
Market value of a bond = PV of coupon payments + PV of principal
Par-value bonds
Company ABC issues a $1m bond that will pay a 10% semiannual (coupon) for five years and similar bonds are paying 10%.
Market value = $1m
Face value or principal or book value = $1m
Bond issued at a Premium
Company ABC issues a $1m bond that will pay a 11% semiannual (coupon) for five years and similar bonds are paying 10%. Bond premiums are amortized using straight-line depreciation.
Bond issued at a Discount
Company ABC issues a $1m bond that will pay a 9% semiannual (coupon) for five years and similar bonds are paying 10%. Bond discounts are amortized using staring-line depreciation.
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