How are Bond Prices Determined The selling price of bonds are based on two amounts. 1. Present Value of face Amount The present value of the face amount(constant)of the bond at its maturity date, based on the current market interest rate(variable) 2. Present Value of Interest Payments The present value of the periodic interest payments (constant) for the term of the bonds, based on the current market interest rate(variable) c13-11
C13 - 11 How are Bond Prices Determined 1. Present Value of Face Amount The present value of the face amount (constant) of the bond at its maturity date, based on the current market interest rate (variable). 2. Present Value of Interest Payments The present value of the periodic interest payments (constant) for the term of the bonds, based on the current market interest rate (variable). The selling price of bonds are based on two amounts
Market and contract Interest rates Differences in market and bond contract interest rates result in discounts and premiums When Bonds sell at Market rate Contract rate Face value Market rate Contract rate Discount Market rate Contract rate Premium c13-12
C13 - 12 Market and Contract Interest Rates Differences in market and bond contract interest rates result in Discounts and Premiums. When Bonds sell at Market rate = Contract rate Market rate > Contract rate Market rate < Contract rate Face value Discount Premium
Cash Flow of Bonds payable On January 1, $100,000 of 12%, five-year bonds, with interest of $6,000 payable semiannually are issued Market rate is 13% at date of issue Cash Outflows: Present values Interest payments $60,000=$43,133 (10 periods at $6,000) Face amount 100.000=53,273 (at end of 5 years) $160,000=$96,403 Cash Inflows: Selling proceeds $96,406=$96,406 c13-13
C13 - 13 Cash Flow of Bonds Payable Cash Outflows: Interest payments $ 60,000 = $ 43,133 (10 periods at $6,000) Face amount 100,000 = 53,273 (at end of 5 years) $160,000 = $96,403 Cash Inflows: Selling proceeds $ 96,406 = $96,406 Present Values On January 1, $100,000 of 12%, five-year bonds, with interest of $6,000 payable semiannually are issued. Market rate is 13% at date of issue