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Acc 545 Dq 4

In: Business and Management

Submitted By midwestlady28
Words 544
Pages 3
The accounting valuation of bonds at the date of issuance takes time to process. The first step involves the issuing company arranging for underwriters to help market and sell the bonds. The second step is for the issuing company to obtain approval by the Securities and Exchange Commission to issue the bond, undergo audits, and issue a prospectus. The bond certificates are then printed to complete initial issuing of the bonds.
The supply and demand of the buyers and sellers, relative risk, market conditions, and state of the economy set the selling price of a bond issue. A bond is valued by the investment company at the present value of its expected future cash flows. The expected future cash flows include the principal and interest.
The interest rate is written in the terms of the bond indenture and is either stated, nominal, or coupon rate and is stated as a percentage of the face value of the bonds. This value is also called par value, maturity value, or principal value.
The actual price of the bonds that the buyers pay is determined by the difference between the face value and the present value of the bonds. The difference will come out to be either a discount or a premium.
The rate of interest that the bondholders will actually earn is the market rate or effective rate. When bonds are sold at a discount the effective yield will exceed the stated rate. When bonds are sold below face value investors are demanding a higher rate of interest than the stated rate.
When bonds are issued on an interest payment date at par value no interest is accrued and there is no premium or discount.

The methods that are applied for bond discount and premium amortization are that companies amortize the discount and charge it to interest expense over the period of time that the bonds are outstanding. The discount can be amortized using the straight-line method by

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