1. How Bonds Work Georgia CTAE Resource Network Instructional Resources Office Written by: Dr. Marilynn K. Skinner May 2009

2. Bond terms • Face Value • Coupon Rate • Maturity • Market Rate

3. Bond Example • A company issues a $30,000 10-year bond with a 6% coupon rate. Each year, the owner receives $1,800 (6% of $30,000), paid in two semiannual installments of $900.

4. Bond Example

5. Journal Entry – Sale of Bonds at Face Value

6. Journal Entry – Payment of Bond Interest

7. Bond Prices How are they quoted?

8. Bond Prices How are they quoted? As a percentage of face value!

9. Bond Prices

10. Market Rate > Coupon Rate • A company issues a $30,000 10-year bond with a 6% coupon rate. Each year, the owner receives $1,800 (6% of $30,000), paid in two semiannual installments of $900. Bond sells at 95.

11. Journal Entry – Sale of Bonds at 95

12. Journal Entry – Payment of Bond Interest

13. Journal Entry – Amortization of Discount

14. Figuring Book Value

15. Market Rate < Coupon Rate • A company issues a $30,000 10-year bond with a 6% coupon rate. Each year, the owner receives $1,800 (6% of $30,000), paid in two semiannual installments of $900. Bond sells at 103.

16. Journal Entry – Sale of Bonds at 103

17. Journal Entry – Payment of Bond Interest

18. Journal Entry – Amortization of Discount

19. Figuring Book Value

20. Review Terms • Bond • Face Value • Coupon Rate • Maturity • Market Rate • Bond prices • Book Value