Question

If the yield on the Treasury Bill increased, how does it affected companies in the process of selling bonds on the market, the periodic semi-annual cash flows was too little to cover the amount of interest required by investors. How this matter affects a bond issuer from an accounting point of view?

Answer 1

First we will see how the yield effect the selling price of a bond the equation for finding out the price of a bond is

= Interest paid annually on bonds/ yield required by investor

If the yield increases the price will be decreased (you can take a numerical example and you will find that price affects adversely)

As the question clearly stated that cash flows (interest payments) are very less than interest required by investor that means bonds can be sold on a lower price only.

From accounting point of view the issuer will affect in following ways

• The semi annual cash flow will be increased if issuer wants a high selling price on bonds
• If the above is not increased the bond can be sold on a lower price so the issuer ‘ cost of debt and capital will be increased.
• The discount on bonds (as sold on a lower price) will be increased and amortisation of it lower the profits of the issuer.
• Also if interest rates is increased the profits and cash flow will be affected.