Examples of convertible bond in the following topics:
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- A term bond matures on the same date as all other bonds in a given bond issue.
- A convertible bond may be exchanged for shares of stock of the issuing corporation at the bondholder's option.
- Although any type of bond may be convertible, issuers add this feature to make risky debenture bonds more attractive to investors.
- A bond with nondetachable warrants is virtually the same as a convertible bond; the holder must surrender the bond to acquire the common stock.
- Differentiate be the various types of bonds including secured and unsecured, registered and unregistered and convertible
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- Types of cash include currency, funds in bank accounts, and non-risky financial instruments that are readily convertible to cash.
- Cash equivalents can also include government and corporate bonds, marketable securities and commercial paper.
- So if a corporate bond matures within three months, but the company that issued it may not be able to settle the debt, one would not be able to include that as a cash equivalent.
- Other investments and securities that are not cash equivalents include postage stamps, IOUs, and notes receivable because these are not readily converted to cash.
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- 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.
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- 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.
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- 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
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- 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.
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- 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.
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- 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
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- 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.
- A bond is a debt security under which the bond issuer owes the bond holder a debt including interest or coupon payments and or a future repayment of the principal on the maturity date.
- High-yield bonds are bonds that are rated below investment grade by the credit rating agencies.
- Most callable bonds allow the issuer to repay the bond at par.
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- When a business sells a bond at a discount, it must record a discount balance in its records and amortize that amount over the bond's term.
- For the issuer, recording a bond issued at a discount can be a little more difficult than recording a bond issued at par value.
- When a bond is sold at a discount, the market rate of the bond exceeds the contract rate.
- When a bond is sold, the company records a liability by crediting the "bonds payable" account for the bond's total face value.
- A bond's discount amount must be amortized over the term of the bond.