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Interest Rates and Bond Prices. IF STATED RATE BONDS ISSUED. Above face value at a premium At face value Below face value at a discount. > MARKET RATE. = MARKET RATE. < MARKET RATE. Amortization of Bond Premiums and Discounts.

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Interest rates and bond prices
Interest Rates and Bond Prices

IF STATED RATEBONDS ISSUED

Above face value at a premium

At face value

Below face value at a discount

> MARKET RATE

= MARKET RATE

< MARKET RATE


Amortization of bond premiums and discounts
Amortization of Bond Premiums and Discounts

Periodically transfer a portion of discount or premium from respective account to interest expense over the life of the bond using the effective interest method

Premium

reduces

interest

expense

Discount

increases

interest

expense

LO5


Reporting and interpreting owners equity

Reporting and InterpretingOwners’ Equity

Chapter 11



Understanding the business

Incur liabilities.

Own assets.

Sue and be sued.

Enter into contracts.

Understanding The Business

Advantages of a corporation

Simple to become an owner

Easy to transfer ownership

Provides limitedliability

Because a corporation is a separate legal entity, it can . . .


Ownership of a corporation

Voting (in person or by proxy).

 Proportionate distributions of profits.

Stockholders’

Rights

 Proportionate distributions of assets in a liquidation.

Ownership of a Corporation


Ownership of a corporation1
Ownership of a Corporation

Elected byshareholders

Appointedby directors


Expanded accounting equation
Expanded Accounting Equation

Assets = Liabilities + Stockholders’ Equity

Contributed

Capital

Retained

Earnings


Retained earnings connects the income statement and the balance sheet
Retained Earnings Connects the Income Statement and the Balance Sheet

Income Statement

Revenues $ xxx

Less, Expenses xxx

Net Income $ inc

Statement of Retained Earnings

Retained Earnings, Beginning Balance $ xxx

Add, Net Incomeinc

Deduct, Dividends xxx

Retained Earnings, Ending Balance $ end

Balance Sheet

Total Assets $ xxx

Total Liabilities xxx

Stockholders’ Equity xxx

Retained Earnings end

Total Liabilities and Stockholders' Equity $ xxx


Stockholders equity components
Stockholders’ Equity Components Balance Sheet

Common

Stock

Preferred

Stock

Treasury

Stock

Additional

Paid-in

Capital

Retained

Earnings

LO1


Contributed capital

Certificate Balance Sheet

of Stock

Contributed Capital

  • Common Stock

    • Basic stock of corporation

    • Normally carries voting rights

  • Preferred Stock

    • Optional

    • Tailored to meet specific needs


Number of shares of stock

Maximum Balance Sheet

Allowable

1,000

Number of Shares of Stock

Authorized

Issued –

sold or distributed

Outstanding –

not repurchased or retired


Authorized issued and outstanding shares
Authorized, Issued, and Outstanding Shares Balance Sheet

Authorized shares are the maximumnumber of shares of capital stock thatcan be sold to the public.

Issued shares are authorized shares of stock that have been sold.

Unissued shares are authorized shares of stock that never have been sold.


Authorized issued and outstanding shares1

Outstanding shares Balance Sheetare issued shares that are owned by stockholders.

Issued

Shares

Treasury sharesare issued shares that have been reacquired by the corporation.

Authorized, Issued, and Outstanding Shares

Outstanding

Shares

Unissued

Shares

Treasury

Shares


Vestige
vestige Balance Sheet

ves·tige \ves-tij\ noun

Etymology: Middle English, from Middle French, from Latin vestigium footstep, footprint, track, vestige (15th century)

A trace, mark, or visible sign left by something (as an ancient city or a condition or practice) vanished or lost.


Par value pp 523 524

Certificate of Stock Balance Sheet

$1.00 Par Value

Par Value(pp. 523-524)

  • Vestigial legal concept under state law

  • Arbitrary amount

  • May also called “stated value”


Par value and no par value stock

Some states do not require that a par value be stated in the charter.

Some states do notrequire a par value to be stated in the charter.

Par Value and No-par Value Stock

Par Value

Market Value


Additional paid in capital

Certificate of Stock charter.

$1.00 Par Value

15

Additional Paid-in Capital

  • Amount received in excess of par when stock was issued


Additional paid in capital1
Additional Paid-in Capital charter.

  • Paid-in capital (p. 520)

  • Additional paid-in capital

  • Paid-in capital in excess of par

  • Premium on stock

  • Capital surplus (not GAAP; may be used in law)


Retained earnings accumulated deficit
Retained Earnings/Accumulated Deficit charter.

  • Accumulated net income and net losses, less dividends, since inception of corporation

  • Because of the concepts of historical cost and matching, bears no relation to available assets or their value


Stock issued for cash

Example charter.

Common Stock $ 10,000

( $10 par value × 1,000 shares)

1,000 shares of

$10 par value stock

sold for $15 per share

Additional Paid-In Capital $5,000

(($15 – $10) × 1,000 shares)

Stock Issued for Cash

Cash 15,000

Common Stock 10,000

Additional Paid-In Capital—Common 5,000

To record the issuance of 1,000 shares of $10 common stock at $15 per share.

LO3


Stock issued for noncash consideration

Certificate of Stock charter.

Stock Issued for Noncash Consideration

  • Record at fair market value of consideration given or received, whichever is more readily determinable

Title

to land,

building,

etc.


Treasury stock

Certificate of Stock charter.

Treasury Stock

  • Another vestigial concept

  • Company buys back its own stock

  • Contra-equity account (debit balance)

  • Not outstanding (no stockholder rights)

LO4


Reasons for repurchasing stock
Reasons for Repurchasing Stock charter.

  • Provide for employee bonuses or benefit plans

  • Maintain a favorable market price (antidilution)

  • Improve financial ratios

  • Maintain control of ownership

  • Prevent unwanted takeover or buyout attempt


Presentation of treasury stock
Presentation of Treasury Stock charter.

Common stock, $10 par value, 1,000

shares issued, 900 outstanding$10,000

Additional paid-in capital—Common 12,000

Retained earnings 15,000

Total contributed capital and

retained earnings 37,000

Less, Treasury stock, 100 shares

at cost ($25 per share) 2,500

Total stockholders’ equity $34,500


Preferred stock

$100 par charter.

7% preferred stock

,

Preferred Stock

  • Preference(s) over common stock

  • Can be tailored to specific needs of firm

  • Dividend preference may have stated dividend rate

    • Percentage of the stock’s par value

    • Per-share dollar amount

LO2


Preferred stock features pp 525 526

2005 charter.

2006

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2007

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Preferred

Common

Preferred Stock Features(pp. 525-526)

  • Cumulative

  • Participating

  • Callable (form over substance?)

  • Convertible


Wachovia Swings to Loss, Plans to Raise Capital charter.

By KEVIN KINGSBURYApril 14, 2008 10:00 a.m.

Battered by sinking credit quality and an ill-timed acquisition of a California mortgage lender, Wachovia [Corporation] plunged into the red in the first quarter and will sell more stock to shore up its capital levels.

In response, the bank will raise $7 billion in fresh capital by selling common and preferred stock -- $3.5 billion of each -- and will save another $2 billion a year by cutting its dividend 41%.

The common stock will be lowered at $24 a share, a 14% discount to Friday's closing price. The preferred stock will pay a 7.5% dividend and each $1,000 investment will convert into 32.0513 shares, or $31.20 a share.


Xerox Declares First Common Stock Dividend in Six Years charter.

NORWALK, Conn., Nov. 19, 2007  -- Xerox Corporation's (NYSE: XRX) board of directors declared a quarterly cash dividend on Xerox common stock.


Best Buy Boosts Payout, Unveils Buyback Plan charter.

JUNE 21, 2011, 1:38 P.M. ET

By Matt Jarzemsky of DOW JONES NEWSWIRES NEW YORK (Dow Jones)

Best Buy Co.'s (BBY) board authorized a $5 billion stock-repurchase program and a 7% dividend increase, returning cash to shareholders as the electronics retailer works to shrink its "big box" presence amid lackluster consumer demand.


Dividend requirements
Dividend Requirements charter.

  • Sufficient cash

  • Positive retained earnings (or other state law requirements)


Cash dividends

Date charter.

dividend check for

Jane Doe

Dept.. of Treasurer

on

1

2

3

1

2

3

4

5

6

7

8

9

10

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31

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31

Payment

date

Declaration

date

Cash Dividends

Paid

to

Record

date


Dividends
Dividends charter.

Journal entry required to record

(1)dividends declared

(2) dividends paid

12/31/07

1/15/08

Reduce

retained

earnings

Pay

dividends


Recording cash dividends

Date charter.

dividend check for

Jane Doe

Dept.. of Treasurer

Recording Cash Dividends

Retained Earnings XXX

Cash Dividend Payable XXX

To record the declaration of a cash dividend.

Cash Dividend Payable XXX

Cash XXX

To record the payment of a cash dividend.


Allocation of cash dividends

2004 charter.

1

2

3

2005

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2006

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Allocation of Cash Dividends

  • Distribute dividends in arrears, if any, to preferred

  • Distribute current year’s dividends to preferred

  • Distribute remainder to common (or to both if preferred is participating)

LO5


Cash dividends example
Cash Dividends Example charter.

Stricker Company declares a $70,000 dividend in 2007 (no dividends were paid in 2005 or 2006). There are 10,000 shares of $10 par, 8% preferred stock and 40,000 shares of $5 par common stock outstanding.


Cash dividends example1
Cash Dividends Example charter.

Noncumulative Preferred Stock

To Preferred To Common

Step 1: Distribute current-year dividend

to preferred (10,000 shares × $10 par ×

8% × 1 year) $8,000

Step 2: Distribute remaining dividend to

common ($70,000 – $8,000) $62,000

Total allocated $8,000 $62,000

$0.80

per share

$1.55

per share


Cash dividends example2
Cash Dividends Example charter.

Cumulative Preferred Stock

To Preferred To Common

Step 1: Distribute dividends in arrears

to preferred (10,000 shares × $10 par ×

8% × 2 years) $16,000

Step 2: Distribute current-year dividend

to preferred (10,000 shares × $10 par ×

8% × 1 year) 8,000

Step 3: Distribute remainder to common

($70,000 – $24,000) $46,000

Total allocated $24,000 $46,000

$2.40

per share

$1.15

per share


Dividend payout ratio p 529

Date charter.

Dividend check for

Jane Doe

I.M. Treasurer

Dept.. of Treasurer

Dividend Payout Ratio(p. 529)

Annual Dividend Amount

Annual Net Income

The % of

earnings paid

as dividends


Stock dividends

Certificate of Stock charter.

Certificate of Stock

Certificate of Stock

Certificate of Stock

Certificate of Stock

Certificate of Stock

Stock Dividends

Issue of additional shares proportionately to existing stockholders

  • Reasons

    • Insufficient cash?

    • Market price reduction

    • Nontaxable to recipients

LO6


Stock splits

Certificate of Stock charter.

Certificate of Stock

$3 par value

Certificate of Stock

Certificate of Stock

$1 par value

Stock Splits

  • Result in additional issuance of shares

  • Reduce par value per share

  • No change in Stockholders’ Equity accounts

LO 7


Stock splits1

Disclose charter.

in notes

Stock Splits

  • Not recorded in accounts

  • Reduce market price per share and make the stock more accessible to a wider range of investors


Statement of stockholders equity
Statement of Stockholders’ Equity charter.

Explains all reasons for the difference between beginning and ending balances of each of the accounts in the Stockholders’ Equity section of the Balance Sheet

LO8



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