Question

When calculating the market value of your bond, what calculations do you need to complete?

Question 1 options:

	Both present value of a lump sum and present value of an annuity
	Future value of an annuity
	Future value of a lump sum
	Present value of an annuity
	Present value of lump sum
	Both future value of a lump sum and future value of an annuity

Why might a company issue bonds as opposed to stock?

Question 2 options:

	To finance a large project
	To increase their ROE
	To change their ownership structure
	To get a tax deduction
	To avoid paying interest

When journalizing both bond interest payments and installment note payments, the numbers in the journal entry do not change.

Question 3 options:

	True
	False

When the coupon rate of a bond is higher than the market rate, the bond will sell for a discount.

Question 4 options:

	True
	False

You have an outstanding bond with a par value of $500,000 and a call premium (should we call the bond) of $5,000. The current carrying value is $502,000. You call the bond. What is your journal entry?

Answer 1

Ans to Q.1 For calulating market price of bond we need to calulate both present value of annuity and present value of lump sum.

Reason :- The market price of the bond comprises two parts. The first part is the present value of the bond's face value. The second part is the present value of the bond's interest payments.

Ans to Q.2   Why might a company issue bonds as opposed to stock?

	To finance a large project :- Company may prefer to issue bonds instead of stock for large project as it is comparatively easier and cheaper to issue bonds than stock.Investors normally prefer bonds due to steady income and early repayment.It will also not get the ownership diluted and bonds is a debt and stock is owned capital which dilutes the ownership of existing shareholders.
	To increase their ROE : Return on Equity is the ratio of net earning to equity. So equity is in denominator and hence when it is less the ROE will increase.
	To change their ownership structure : No issue of bonds will not change ownership structure of a company as it is a type of loan.
	To get a tax deduction : Yes interest on bonds is allowable deduction in corporate profit but dividend on stock is not a deduction allowable from corporate profit.
	To avoid paying interest : No. Bonds being debt carries interest. It increases interest burden as well as cash drain due to payment of interest quarterly or six monthly. Answer 3. True .   When journalizing both bond interest payments and installment note payments, the numbers in the journal entry do not change as we can pass a combined entry as follows -- Bond Interest A/c - Dr Bonds Payable A/c -Dr To Cash/ Bank A/c Answer 4.  When the coupon rate of a bond is higher than the market rate, the bond will sell for a discount. False. AS coupon rate is higher than the market rate , investors will rush to purchase it and may get sold at even premium.