Essay on Accounting Interest and Bond - 8255 Words

Part 3 Valuation of Securities Chapters in this Part Chapter 6 Interest Rates and Bond Valuation Chapter 7 Stock Valuation Integrative Case 3: Encore International  © 2012 Pearson Education, Inc. Publishing as Prentice Hall Chapter 6 Interest Rates and Bond Valuation ï  ® Instructor’s Resources Overview This chapter begins with a thorough discussion of interest rates, yield curves, and their relationship to required returns. Features of the major types of bond issues are presented along with their legal issues, risk characteristics, and indenture convents. The chapter then introduces students to the important concept of valuation and demonstrates the impact of cash flows, timing, and risk on value. It explains†¦show more content†¦We are informed that $383 billion is the 2009 interest expense and that the national debt was about $12 trillion in 2009 (i.e., $13 trillion less more than $1 trillion accrued in 2009). Division of the interest payment by the total debt results in an interest rate of 3.19 percent (i.e., $383 billion à · $12 trillion). Assuming the Treasuries are priced at par, one ends up with $31.90 per thousand being the annual payment needed to result in Treasuries being priced at par. If interest rates rise by 1% to 4.19 percent, the price of the federal debt would fall to $955.71, as computed below. N = 5, I = 4.19, PMT = 31.9, and FV = $1,000 Solve for PV = $955.71 The drop in Treasury values would be about 4.4 percent. This would decrease the size of the federal debt by $572 billion (0.044 Ãâ€" $13 trillion). Hence, if one considers the size of the current federal budget deficit in isolation, there is an incentive for the government to pursue policies which will lead to higher inflation. However, higher prices will lead to higher future costs for goods and services purchased by the government and an increase in the cost of entitlements, making proper use of interest rates to properly manage the federal budget difficult, complicated, and, alas, political. ï  ® Answers to Review Questions 1. The real rate of interest is the rate that creates an equilibrium between the supply of savings and demand for investment funds. The nominalShow MoreRelatedAccounting: Questions and Answers930 Words   |  4 Pagesapplying the following accounting principles: preparing necessary journal entries to record the issuance of bonds; the periodic interest; amortization of bond premiums and discounts; calculate depreciation and amortization expense using various methods...and give an example for each. preparing necessary journal entries to record the issuance of bonds. The journal entries are crucial in order to trace the issuance of the bonds. 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Even though the company is in the process of reorganizing one believes this information will help a company in reporting the restructuring of debt. One will provide information on the requirements of reporting debt on bonds, notes, and capital leases. In performing this one will also provide the journal entries one would need to record to restructure the company’s debt along with a comparison of the debt for the company’s current reporting. One will also provide valuable