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The expected rate to issue new bonds
YTM on BBB bonds = 11.5%
Long-term risk-free government bonds = 8.7%
Risk premium on BBB bonds = 11.5%-8.7%=2.8%
Current risk premium = 50%*2.8%=1.4%
Current long-term risk-free government bonds = 7.8%
Current YTM on BBB bonds = 7.8%+1.4%=9.2%
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Municipal bonds
The default risk on municipal bonds exceeds that on treasury bonds.
C. The liquidity of municipal bonds exceeds that of treasury bonds.
D. Default-free treasury bonds include more income tax breaks relative to municipal bonds. A.
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Bonds Payable
139576 Bonds Payable 23.
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Straight Line Method and Bond Terminology
Listed below are common terms associated with bonds:
a. Bond certificate
b. Bond issue
c. Bond indenture
d. Unsecured bonds
e. Debenture bonds
f. Secured bonds
g. Term bonds
h. Serial bonds
i. Registered bonds
Required
1.
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Convertible bonds and stock warrants
Since the bonds are convertible bonds, there is no relevance of the price if the bonds were not convertible.
3.
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Bond Valuation
The current-risk premium on BBB bonds versus government bonds is half of what it was two years ago. If the risk-free long-term government bonds are currently yielding 7.8%, then at what rate should Rollincoast expect to issue new bonds?
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Entries to Record Issuance of Bonds, Interest Accrual, and Bonds
111435 Prepare entries to record issuance of bonds, interest accrual, and bond redemption Hornung Electric sold $300,000, 10%, 10 yr bonds on Jan. 1, 2006. The bonds were dated Jan. 1 and paid interest on Jan 1 and July 1.
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Using Straight-Line Amortization to Compute the Gain/Loss
Since bonds are purchased on discount, the discount would be amortized over the life of the bond
Face Value of Bonds $3,000,000
Purchase Value of Bonds $2,946,000
Discount on Bonds $54,000
We are using straight
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Southeast Airlines Bonds
Liabilities
Long-term debt (bonds) 400,000
Accrued interest on Bonds 36,000
Premium on Bonds payable 18,000
Interest payable 18,000
(c) On January 1, 2007 when the carrying value of the bonds was $416,000 the company redeemed the bonds
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Corporate vs. government bonds
However, it is also noteworthy that government bonds usually have a lower return than corporate bonds and in most cases government bonds are considered less risky. Further, many government bonds are partially to fully tax exempt.
2.