Essay About 3/30/15Bond Amortization Schedule And Bond Redemptions

Bond Amortization Schedule
BONDS – 3/30/15Bond amortization schedule (handout)Bond Redemptions (Pay-offs)Repay at maturity Repurchase on open market before maturity Not always easy to do Many investors want to just hold bonds until maturity (unless there is a call feature)If callable, repurchased at the call price Callable Bonds (handout)Ex: callable at 102 → 102% of face value = $102,000 Bonds called 4/1/14Bond issuance costs: originally $5,000LOSS Paid $102k when could have held to maturity and paid only $100kCallable bonds almost ALWAYS cause a loss for the issuer Not necessarily a bad thing, though, if bonds can be issued at a lower rate Bond issuance costs – expenses incurred to prepare the bond indenture (contract)Lawyer fees, investment bank fee, etc. Lots of costs Issuer obtains benefit from issuing bonds: throughout life of bonds How do you handle bond issuance costs?Expenses are capitalized as an asset and amortized over the life of the bonds As an expense Basically a “prepaid expense” (asset)Convertible debt $1,000 convertible bond → 1 share common stock Date of issuance FV of stock = $600You hope that the FV of the stock increases in the future so that you can convert and make money 1 convertible bond → 4 shares of stock 2 for 1 stock split = 1 convertible bond → 8 shares of stock Whenever there is a stock split, must go back and adjust for things like convertible debt Conversion feature pre-stock split should = post-stock split conversion feature PROBLEM 6:Book method:B/P         5,000        Bond Discount $100        C/S                $50 (5 bonds x 10 shares each @ $1 par)        APIC, C/S        $4,850 ($4,900 – $50)FV method: based on FV of stock, there would be a loss (but most companies use book method?)B/P        5,000Loss         600 → PLUG        Bond Discount 100        APIC, C/S         5,450 (50 shares x $110 FMV)Owner equity goes up more (but NOT actually) → shifting it from RE to APIC So why use FV and take loss in order to get more APIC?Doesn’t seem very likely Debt-Equity Book Value → based on C/SNot much value to it if company is repurchasing shares of stock BV/share = take with grain of salt-not always the best measurements of OPERATING companies^^ → (10:15 in lecture)Ex: L-Brands Billions in market cap (book value)Negative owners’ equity, though Issued stock @ $1 per share Repurchase stock @ $100 per share Retire that stock (not treasury stock) → issue price must be reversed R/E         99C/S        1CASH         100Big deficit in RE → negative owner’s equity Stock WarrantsFall into 1 of 2 categories:Non-detachable → convertible bond Can’t detach warrant from bondMust turn the bonds in when you convert them to stockAlso must normally pay some cash along with that Increase stock price to account for the cash paid as part of the conversion Account for them like convertible bondsOnly records: DEBTDetachable Record: debt (bonds) AND equity (warrants)Separate issue price into 2 pieces Only have to turn the warrant in with a detachable stock warrant (can still hold on to the bonds) → left with bonds and stock PROBLEM 7:a)Cash                 1,040Discount on BP      60Bonds Payable        1,000 → allocated $940 to bonds (because 100 allocated to warrants) = $60 assumed discount