Question

In: Accounting

Complete an internet search to find the Comprehensive Annual Financial Report (CAFR) for your city (...

Complete an internet search to find the Comprehensive Annual Financial Report (CAFR) for your city ( Wilmington, Delaware). Examine the financial report to help you determine the following:

  1. Determine the amount of long-term bonds currently outstanding.
  2. Read the supporting information to your municipality’s financial statements and record
    1. The market interest rate(s) of the bonds.
    2. The date(s) when the bonds will mature.
    3. The original issue amount of the bonds.

Solutions

Expert Solution

A icomprehensive iannual ifinancial ireport i(CAFR) iis ia icomplete iset iof ifinancial istatements iissued iby ia igovernment ientity iin iaccordance iwith ithe irequirements iof ithe iGovernmental iAccounting iStandards iBoard. iThe ireport iis icomprised iof ithe ifollowing ithree isections:

a. Introductory

b. Financial

c. Statistical

The iIntroductory isection iorients iand iguides ithe ireader ithrough ithe ireport. iThe iFinancial isection ipresents ithe ientity’s ibasic ifinancial istatements ias iwell ias inotes ito ithe istatements iand ithe iindependent iauditors’ ireport. iThe iStatistical isection iprovides iadditional ifinancial iand istatistical idata, iincluding idata iabout ifinancial itrends ithat imay ibetter iinform ithe ireader iabout ithe igovernment’s iactivities.

The iCAFR idescribes iwhat iwas ispent iby ithe ireporting ientity iduring ithe ipast iyear, ias iwell ias ithe iending istate iof iits iassets iand iliabilities. iThe ireport iis ia isummarization iof iall iof ithe iannual ireports iof ithe ientity’s iagencies.

i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i iBond ivaluation iis ia itechnique ifor idetermining ithe itheoretical ifair ivalue iof ia iparticular ibond. iBond ivaluation iincludes icalculating ithe ipresent ivalue iof ia ibond's ifuture iinterest ipayments, ialso iknown ias iits icash iflow, iand ithe ibond's ivalue iupon imaturity, ialso iknown ias iits iface ivalue ior ipar ivalue. iBecause ia ibond's ipar ivalue iand iinterest ipayments iare ifixed, ian iinvestor iuses ibond ivaluation ito idetermine iwhat irate iof ireturn iis irequired ifor ia ibond iinvestment ito ibe iworthwhile. i i i i i i

i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i iBond ivaluation iis ia iway ito idetermine ithe itheoretical ifair ivalue i(or ipar ivalue) iof ia iparticular ibond. iIt iinvolves icalculating ithe ipresent ivalue iof ia ibond's iexpected ifuture icoupon ipayments, ior icash iflow, iand ithe ibond's ivalue iupon imaturity, ior iface ivalue. iAs ia ibond's ipar ivalue iand iinterest ipayments iare iset, ibond ivaluation ihelps iinvestors ifigure iout iwhat irate iof ireturn iwould imake ia ibond iinvestment iworth ithe icost. i i

i i i

i i i i i i i i i i i i i i i i i i i i i i i i i i iWhen iconsidering ithe ipurchase ior isale iof ia imunicipal ibond, ithere iare imany iimportant ifactors ian iinvestor ishould iconsider. iOne isuch ifactor iis ithe iissuer’s ifinancial icondition iand iperformance. iThe iaudited ifinancial ireport iis ia isource iof iinformation iabout ian iissuer’s ifinances, ifinancial iposition iand ioperating iresults iprepared iby ian iindependent iparty isuch ias ia icertified ipublic iaccounting ifirm ior ia istate iauditor.

i i i i i i i i i i i i i i i i i iThe iaudited iannual ifinancial ireport iprovides ia isnapshot iof ia imunicipal ibond iissuer‘s ifinancial iand ioperating icondition iat ia ispecified ipoint iin itime. iA imunicipal ibond iissuer’s iannual iaudited ifinancial ireport ioffers ia iroadmap ito iunderstanding ithe ifinancial ihealth iand ifinancial irisks ithat imay iimpact ithe iissuer’s iability ito ipay iprincipal iand iinterest ion iits ibonds.

i i i i i i i i i i i i i i i i i i i i i i i i iThe imaturity idate iis ithe idate ion iwhich ithe iprincipal iamount iof ia inote, idraft, iacceptance ibond ior iother idebt iinstrument ibecomes idue. iOn ithis idate, iwhich iis igenerally iprinted ion ithe icertificate iof ithe iinstrument iin iquestion, ithe iprincipal iinvestment iis irepaid ito ithe iinvestor, iwhile ithe iinterest ipayments ithat iwere iregularly ipaid iout iduring ithe ilife iof ithe ibond, icease ito iroll iin. iThe imaturity idate ialso irefers ito ithe itermination idate i(due idate) ion iwhich ian iinstallment iloan imust ibe ipaid iback iin ifull.

1. The imaturity idate irefers ito ithe imoment iin itime iwhen ithe iprincipal iof ia ifixed iincome iinstrument imust ibe irepaid ito ian iinvestor.

2. The imaturity idate ilikewise irefers ito ithe idue idate ion iwhich ia iborrower imust ipay iback ian iinstallment iloan iin ifull.

3. The imaturity idate iis iused ito iclassify ibonds iinto ithree imain icategories: ishort-term i(one ito ithree iyears), imedium-term i(10 ior imore iyears), iand ilong iterm i(typically i30 iyear iTreasury ibonds).

4. Once ithe imaturity idate iis ireached, ithe iinterest ipayments iregularly ipaid ito iinvestors icease isince ithe idebt iagreement ino ilonger iexists.

Maturity idates iare iused ito isort ibonds iand iother itypes iof isecurities iinto ione iof ithe ifollowing ithree ibroad icategories:

a. Short-term: iBonds imaturing iin ione ito ithree iyears

b. Medium-term: iBonds imaturing iin i10 ior imore iyears

c. Long-term.: iThese ibonds imature iin ilonger iperiods iof itime, ibut ia icommon iinstrument iof ithis itype iis ia i30-year iTreasury ibond. iAt iits itime iof iissue, ithis ibond ibegins iextending iinterest ipayments--generally ievery isix imonths, iuntil ithe i30 iyears iloan ifinally imatures.

i i i i i i i i i i i i i i i i i i i i i i i i i i i i i iAn ioriginal iissue idiscount iis ithe idifference ibetween ithe iface iamount iof ia ibond iand ithe iprice iat iwhich iit iis ioriginally isold ito ian iinvestor iby ithe iissuer. iWhen ithe ibond iis ieventually iredeemed ion iits imaturity idate, ithis idiscount iis ipaid ito ithe iinvestor, iwhich irepresents ia iprofit ifor ithe iinvestor. iFor iaccounting ipurposes, ithe idiscount iis itreated ias iinterest iexpense iby ithe iissuer iand ias iinterest iincome iby ithe iinvestor, iand iis irecognized ias isuch iin itheir iaccounting irecords.

The iamount iof ian ioriginal iissue idiscount ican ibe iparticularly ilarge iwhen ithe iissuer isells izero-interest ibonds. iIn ithis icase, ithe iamount iof ithe idiscount irepresents ithe isole iform iof iincome ifor ithe iinvestor, iwho iwill itherefore ibid ia isubstantially ilower iamount ithan ithe iface ivalue ibefore iagreeing ito ipurchase ithe ibonds.

The iamount iof ian ioriginal iissue idiscount iis ireported iby ithe iinvestor ias ipart iof itaxable iincome ias iit iaccrues iover ithe iremaining ilife iof ithe iunderlying ibond, iirrespective iof ithe ireceipt iof iany ipayments ifrom ithe iissuer iduring ithat itime. iIn iaddition, ithe iinvestor imay ipay itaxes ion ithe iactual iinterest iincome ireceived iand ion iany irealized iappreciation iin ithe imarket iprice iof ithe iunderlying ibond.

1. The ioriginal iissue idiscount i(OID) iis ithe idifference ibetween ithe ioriginal iface ivalue iamount iand ithe idiscounted iprice ipaid ifor ia ibond.

2. OID ibonds ihave ithe ipotential ifor igains isince iinvestors ican ibuy ithe ibonds ifor ia ilower iprice ithan itheir iface ivalue.

3. OID ibonds isold iat ia idiscount icould iindicate ian iissuer iis ifacing ifinancial idifficulty iand idefault iis ipossible.

Once ipurchased, ithe ibond's iissuer iusually ipays ithe ibondholder ian iinterest irate—called ia icoupon—while ithe iinvestor iholds ithe ibond. iPeriodically, ithe ibondholder ireceives iinterest ipayments ibased ion ithe irate iof ithe ibond. iWhen ithe ibond ireaches imaturity, ithe iinvestor igets ithe ireturn iof ithe iface ivalue ipaid ifor ithe ibond.


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