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Assignment Bonds Payable

The document defines and provides examples of various types of debt instruments: - Debentures are unsecured debt instruments issued by companies to raise medium-to-long term funds. - Bonds are secured debt instruments issued by governments, central banks, or large companies that pay fixed interest rates and repay the principal at maturity. - Mortgages are loans secured by residential property that can be seized and sold if payments are missed. - Treasury bills are short-term debt instruments issued by governments that mature within one year. It then provides more detailed explanations and examples of zero-coupon bonds, callable bonds, convertible bonds, serial bonds, and bonds with attached warrants.

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167 views5 pages

Assignment Bonds Payable

The document defines and provides examples of various types of debt instruments: - Debentures are unsecured debt instruments issued by companies to raise medium-to-long term funds. - Bonds are secured debt instruments issued by governments, central banks, or large companies that pay fixed interest rates and repay the principal at maturity. - Mortgages are loans secured by residential property that can be seized and sold if payments are missed. - Treasury bills are short-term debt instruments issued by governments that mature within one year. It then provides more detailed explanations and examples of zero-coupon bonds, callable bonds, convertible bonds, serial bonds, and bonds with attached warrants.

Uploaded by

Lourdios Edullantes
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Lourdios j.

edulantes BSA-2

ASSIGNMENT:

1. What are debts intsruments?

Some of the common types of the debt instrument are:

A. Debentures
Debentures are not backed by any security. They are issued by the
company to raise medium and long term funds. They form the part of the
capital structure of the company, reflect on theábalance sheetábut are not
clubbed with the share capital.

B. Bonds
Bonds on the other hands are issued generally by the government, central
bank or large companies are backed by a security. Bonds also ensure
payment of fixed interest rates to the lenders of the money. On maturity of
the bond, the principal amount is paid back. Bonds essentially work the
way loans do.

C. Mortgage
A mortgage is a loan against a residential property. It is secured by an
associated property. In a case of failure of payment, the property can be
seized and sold to recover the loaned amount.
D. Treasury Bills
Treasury bills are short-term debt instruments that mature within a year.
They can be redeemed only at maturity. They are sold at a discount if sold
before maturity.
2. Define and explain Zero-coupon bonds. Provide illustrations.
A zero-coupon bonds is debt that does not pay interest bu instead trades at
deep discount, rendering a profit at maturity when the bond is redeemed
for its full face value. A zero-coupon bond is also known as accrual bond.
Example:
Cube Bank intends to subscribe to a 10-year this Bond having a face value
of $1000 per bond. The Yield to Maturity is given as 8%.

Accordingly,

Zero-Coupon Bond Value = [$1000/(1+0.08)^10]


Zero-Coupon Bond Value = 463.19
3. Define and explain Callable bonds. Provide illustrations.
Callable bonds- bonds that contain call provisions giving the issuer thereof
the right redeem the bonds prior to their maturity date.
Example:
The call price is price paid to retire the bonds and is stated on the bonds
themselves when they are issued. You might ask why an issuer would issue
bonds and then decide to purchase the bonds back. Most companies issue
bonds to pay for an expansion or some other project. When the project is
over or the company has earned enough money to retire the bonds, it
might decide to do so.

Think about it. If a company issues five-year bonds and retires them in two
year, the company will potentially save three years of interest payments on
the bonds.

4. Define and explain Convertible bonds. Provide illustrations.


Convertible bonds- bonds that give the holder thereof the option of
exchanging the bonds for shares of stocks of the issuer.
ABC LTD issues 1 million convertible bonds of $1 each carrying nominal
interest of 10%. Bondholders are entitled to convert their bonds into $1
ordinary shares of the company on the date of their maturity in three years
time instead of receiving principle repayment.

Interest rate of a similar bond without the conversion option is 15%.

How must ABC LTD account for the convertible bonds upon initial
recognition, subsequent measurement and maturity assuming all bonds are
converted after three years?

Initial Recognition
Following accounting entries must be recorded upon initial recognition:

Dr - Cash/Bank $1,000,000 (Total Proceeds)


Cr - Liability $885,839 (Note 1)
Cr - Share Options (Equity) $114,161 (Balancing Figure)
Note 1:

Present value of future interest payments and principal using 15%:

Year1: $100,000 (interest) x [1/1.15] = $ 86,956.5


Year2: $100,000 (interest) x [1/1.15^2] = $ 75,614.4
Year3: $100,000 (interest) x [1/1.15^3] = $ 65,751.6
Year3: $1,000,000 (principal) x [1/1.15^3] = $ 657,516.0
Total $ 885,839.0
Subsequent Measurement
Interest expense will be charged using 15%. The difference between
interest paid and interest charged will be added to the liability component
as follows:

Interest Expense Liability


$ $
Year1: [885,839 x 15%] 132,876 [885,839 + 132,876 - 100,000*]
918,715
Year2: [918,715x 15%] 137,807 [918,715+ 137,807 - 100,000]
956,522
Year3: [956,522x 15%] 143,478 [956,522+ 143,478 - 100,000]
1,000,000
*$100,000 is the 10% nominal interest.

Maturity
Following accounting entry will be required to account for the conversion
of bonds into shares after three years:

Dr - Liability $1,000,000
Dr - Share Options (equity) $114,161
Cr - Share Capital $1,000,000
Cr - Share Premium $114,161
5. Define and explain Serial bonds. Provide illustrations.
Serial bonds- bonds that have series of maturity dates. These bonds are
payable in installment
Example:
6. Define and explain Bonds with warrants. Provide illustrations
Bonds with warrant- when you buy a bond with an attached warrant, the
warrant gives you the right to buy a certain number of fixed-price shares of
the stock of the company that issues the bond. You are not obligated to
purchase the stock, and the price specified on the warrant may be different
from the price at which the stock is trading on the day you buy your bonds.
Example:
Company XYZ issues bonds with warrants attached, each bondholder might
get a 1,000 face value bond and the right to purchase 100 shares of
company XYZ stock at 20 per share over the next five year. Warrants
usually permit the holder to purchase common stock of the issuer, but
sometimes they allow the purchaser to buy the stock or bonds of another
entity (such as a subsidiary or even a third party).

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