income bond

Examples of income bond in the following topics:

• Other Types of Bonds

  • Other bonds include register vs. bearer bonds, convertible bonds, exchangeable bonds, asset-backed securities, and foreign currency bonds.
  • For example equity-linked notes and bonds indexed on a business indicator (income, added value) or on a country's gross domestic product (GDP).
  • Convertible bonds are bonds that let a bondholder exchange a bond for a number of shares of the issuer's common stock.
  • Especially after federal income tax began in the United States, bearer bonds were seen as an opportunity to conceal income or assets.
  • Eurodollar bond - U.S. dollar-denominated bond issued by a non-U.S.

• 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.
  • Interest income received by holders of municipal bonds is often exempt from the federal tax and the issuing state's income tax.

• Maturity Date

  • Most bonds have a term of up to 30 years.
  • Normally the maturity of a bond is fixed.
  • In this case, the maturity date is the day when the bond is called.
  • Thus, investors should inquire, before buying any fixed-income securities, whether the bond is callable or not.
  • The first Austrian bonds had 5% rates of return and a five-year maturity.

• Overview of Bonds

  • This chapter provides an overview of stocks and bonds, and the methods financial analysts use to calculate the market price using the present value formula.Furthermore, corporations issue a variety of bonds and stocks, and use them to expand business operations.Corporations sell their bonds to investors who buy these bonds and stock for investment.They either hold the bonds until maturity or sell the bonds and stock for a capital gain or loss.Consequently, investors must know the difference between yield to maturity and the rate of return.This chapterexpands on Chapter 6, and we expand the present value formula to value a variety of bonds and stocks.
  • Corporations often borrow money by issuing bonds.A bond is similar to notes payable because they are written promises to pay interest and principal.We show a picture of a bond in Figure 1.Face value of this bond equals $1,000, and this bond matures on February 1, 2020.Consequently, whoever holds this bond will receive $1,000 on this date, and the bondholder also earns $100 ( 0.1 × $1,000) per year in interest.Most bonds pay interest twice annually or $50 every six months for this example.
  • Bonds, however, differ from notes payable.A notes payable is a loan from a single creditor such as a bank, while a bond is a loan that corporations issue in denominations of $1,000, $2,000, etc.Finally, bonds are standardized, and thus, investors can purchase them.Moreover, investors can buy and sell these bonds on the financial markets before the bonds mature.
  • A corporation needing long-term funds may consider issuing additional shares of stock or issuing new bonds.However, if the corporation issues new stock, then the existing stockholders share control with new stockholders.Consequently, the stockholders lose part of control of the corporation.On the other hand, the bondholders do not share in the management or earnings of the corporation.Although the corporation must pay the bond interest, whether it earns profits or losses, bonds reduce net income, thus lowering a corporation's taxes.U.S. corporations pay between 15 and 35% of their net income in taxes.Nevertheless, bond interest payments are an expense, which lowers the corporation's net income.If a corporation issues new bonds, then the common stockholders could increase their dividend earnings.
  • Examining these two plans, Plan B results in a greater income per share for the shareholders because the bond's interest lowered the tax burden by $60,000.Thus, the stockholders retained control of the corporation, and they potentially earn higher dividends per share by using bond financing.

• Amortized Cost Method

  • To find the amortized acquisition cost the securities are amortized like a mortgage or a bond.
  • Z company purchases 40,000 of the 8%, 5-year bonds of Tee Company for $43,412.
  • The bonds provide a 6% return, with interested paid semiannually.
  • The accounting records show the debt at the amortized cost (face amount plus premium/less discount) and the difference between the maturity value and the cost of the bonds is amortized to the income statement over the life of the bonds.
  • To find the amortized acquisition cost the securities are amortized like a mortgage or a bond.

• Reinvestment Risk

  • This primarily occurs if bonds (which are portions of loans to entities) are paid back earlier than expected.
  • For example, falling interest rates may prevent bond coupon payments from earning the same rate of return as the original bond.
  • Reinvestment risk affects the yield-to-maturity of a bond, which is calculated on the premise that all future coupon payments will be reinvested at the interest rate in effect when the bond was first purchased.
  • Maturity of the bond - The longer the maturity of the bond, the higher the likelihood that interest rates will be lower than they were at the time of the bond purchase.
  • Zero coupon bonds are the only fixed-income instruments to have no reinvestment risk, since they have no interim coupon payments.

• Valuing Zero-Coupon Bonds

  • The discount is a contra-liability linked to the bond payable; this yields a net bond payable of 81,629.79, the bond payable less the discount.
  • A zero-coupon bond is one that does not pay interest over the term of the bond.
  • While the business may not make periodic interest payments, interest income is still generated.
  • The interest income is merely accumulated and paid at the end of the bond's term.
  • Zero-Coupon Bond Value = Face Value of Bond / (1+ interest Rate)

• Overview of Convertible Securities

  • Convertible bonds are usually issued offering a higher yield than obtainable on the shares into which the bonds convert.
  • Convertible bonds have all the features of typical bonds, plus the following additional features:
  • Call features: The ability of the issuer (on some bonds) to call a bond early for redemption.
  • Tax advantages: a high tax-paying shareholder can benefit from the company securitizing gross future income on a convertible income that it can offset against taxable profits.
  • In theory, when a stock declines, the associated convertible bond will decline less, because it is protected by its value as a fixed-income instrument.

• Price Transparency

  • Rather, in most developed bond markets such as the United States, Japan, and western Europe, bonds trade in decentralized, dealer-based, over-the-counter markets.
  • This convention, combined with the large number of debt issues outstanding, is largely responsible for the lack of price transparency that exists in the fixed income markets.
  • In the bond market, when an investor buys or sells a bond, the counterpart to the trade is almost always a bank or securities firm acting as a dealer.
  • In some cases, when a dealer buys a bond from an investor, the dealer carries the bond "in inventory. " In other words, the dealer holds it for his own account.
  • In summary, since bonds are traded in a decentralized, over-the-counter market dominated by dealers, there is a lack of price transparency for bond markets.

• Bonds Payable and Interest Expense

  • Bonds derive their value primarily from two promises made by the borrower to the lender or bondholder.
  • Example of bonds issued at face value on an interest date:-
  • On 2010 December 31, Valley issued 10-year, 12% yield bonds with a USD 100,000 face value, for USD 100,000.
  • The income statement for each of the 10 years (2010-2018) would show Bond Interest Expense of USD 12,000 (USD 6,000 X 2); the balance sheet at the end of each of the years (2010-2018) would report bonds payable of USD 100,000 in long-term liabilities.
  • Summarize how a company would record the original issue of the bond and the subsequent interest payments