callable bond

Examples of callable bond in the following topics:

• Redeeming Before Maturity

  • For bond issuers, they can repurchase a bond at or before maturity.
  • To be detailed, the bond issuer will repurchase bonds with callability.
  • These bonds are referred to as callable bonds.
  • Most callable bonds allow the issuer to repay the bond at par.
  • In this case, the price at which bonds are redeemed is predetermined in bond covenants.

• Characteristics of Bonds

  • In finance, bonds are a form of debt: the creditor is the bond holder, the debtor is the bond issuer, and the interest is the coupon.
  • Bonds are debt instruments issued by bond issuers to bond holders.
  • High-yield bonds are bonds that are rated below investment grade by the credit rating agencies.
  • Callability — Some bonds give the issuer the right to repay the bond before the maturity date on the call dates.
  • Most callable bonds allow the issuer to repay the bond at par.

• Types of Bonds

  • The most common secured bonds.
  • This bears the owner's name on the bond certificate and in the register of bond owners kept by the bond issuer or its agent, the registrar.
  • A term bond matures on the same date as all other bonds in a given bond issue.
  • Serial bonds in a given bond issue have maturities spread over several dates.
  • A bond with nondetachable warrants is virtually the same as a convertible bond; the holder must surrender the bond to acquire the common stock.

• Basic Components of Asset Valuation

  • ., bonds issued by a company).
  • Option pricing models are used for certain types of financial assets (e.g., warrants, put/call options, employee stock options, investments with embedded options such as a callable bond) and are a complex present value model.

• Classifying Liabilities

  • Other long-term obligations, such as bonds, can be classified as current because they are callable by the creditor.
  • When a debt becomes callable in the upcoming year (or operating cycle, if longer), the debt is required to be classified as current, even if it is not expected to be called.
  • In situations where a debt is not yet callable, but will be callable within the year if a violation is not corrected within a specified grace period, that debt should be considered current.
  • These usually include issued long-term bonds, notes payables, long-term leases, pension obligations, and long-term product warranties.

• Bond Valuation Method

  • A bond's value is measured by its sale price, but a business can estimate a bond's price before issuance by calculating its present value.
  • The bond's contract rate is another term for the bond's coupon rate.
  • If the market rate is greater than the coupon rate, the bonds will probably be sold for an amount less than the bonds' face value and the business will have to report a "bond discount. " The value of the bond discount will be the difference between what the bonds' face value and what the business received when it sold the bonds.
  • If the market rate is less than the coupon rate, the bonds will probably be sold for an amount greater than the bonds' value.
  • The business will then need to record a "bond premium" for the difference between the amount of cash the business received and the bonds' face value.

• Issuing Bonds

  • On issuance, the journal entry to record the bond is a debit to cash and a credit to bonds payable.
  • Also, the bondholders may sell their bonds to other investors any time prior to the bonds maturity.
  • Bonds can sell for less than their face value, for example a bond price of 75 means that the bond is selling for 75% of its par (face value).
  • The amount of risk associated with the company issuing the bond determines the price of the bond.
  • Explain how a company would record a bond issue and how to determine the selling price of a bond

• Bonds Issued at Par Value

  • To record a bond issued at par value, credit the "bond payable" liability account for the total face value of the bonds and debit cash for the same amount.
  • This generally means that the bond's market and contract rates are equal to each other, meaning that there is no bond premium or discount.
  • When the bond is issued, the company must record a liability called "bond payable. " This is generally a long-term liability.
  • Since the bonds are sold at par value, the amount of cash the company receives should equal the total face value of the issued bonds.
  • This is done by debiting the bond payable account and crediting the cash account for the full book value of the bond.

• Bonds Issued at a Premium

  • When a bond is sold at a premium, the difference between the sales price and face value of the bond must be amortized over the bond's term.
  • This bond sells for $110,000.
  • In this example, the final journal entries will be: Bond Interest Expense $5,000 Bond Premium $1,000 Cash $6,000 Bond Payable $100,000 Cash $100,000
  • When a bond is issued at a premium, that means that the bond is sold for an amount greater than the bond's face value.
  • The difference between the cash from the bond sale and the face value of the bond must be credited to a bond premium account.

• Redeeming at Maturity

  • The journal entry to record the retirement of a bond: Debit Bonds Payable & Credit Cash.
  • A maturity date is the date when the bond issuer must pay off the bond.
  • Bonds can be classified to coupon bonds and zero coupon bonds.
  • For coupon bonds, the bond issuer is supposed to pay both the par value of the bond and the last coupon payment at maturity.
  • Keep in mind the carrying value - cash paid to retire bonds = gain or loss on bond retirement