# Important bond conceptuals

Hi all, Few bond issues, please explain. 1. What is the impact of Impact of issuing different bonds (premium, discount and zero) on Net income? 2. Why is bond with warrant is recorded at discount? 3. What happens to the floating rate bonds when interest rate changes? Many thanks S

1. Bond at premium, higher interest expense: zero coupon, no interest expense 2. hmmm 3. They may temporariliy track at a premium/discount, but will reset to PAR when the rate is reset.

A bond with a warrant acts like a discount bond because warrants are considered equity. At issue, the bond will be accounted for by: increasing assets with the amount received from the issue increasing liability = amout received - value of warrants increase equity by the value of warrants

mcf Wrote: ------------------------------------------------------- > 1. Bond at premium, higher interest expense: zero > coupon, no interest expense > 2. hmmm > 3. They may temporariliy track at a > premium/discount, but will reset to PAR when the > rate is reset. bonds issued at a premium have lower IE,

Say you issue a bond with a face of 1000, and this bond is accompanied by 30 warrants, each worth 1\$. The bond liability is 1000-30=970, equity increases by 30, assets increase by 1000.

getterdone Wrote: > > bonds issued at a premium have lower IE, No. IE is calculated as YTM*Book value of the liability. The book value of the liability is the amount you get for the bond, wich is higher for a premium bond than for a discount bond.

map1 Wrote: ------------------------------------------------------- > getterdone Wrote: > > > > > bonds issued at a premium have lower IE, > > No. IE is calculated as YTM*Book value of the > liability. The book value of the liability is the > amount you get for the bond, wich is higher for a > premium bond than for a discount bond. lets say you have a 5% bond that pays annually, 4%YTM when issued, and its a 5-yr FV=100 pmt=5 YTM=4 5=n CPT PV=104.4518 IE= 4%*104.4518=4.17 which is less than the coupon

lets take the same bond and say it was issued at 6% YTM PV=95.78 IE=6%*95.78= 5.74 IE is higher under discount

Less than the coupon, but greater than the IE of a discount bond.

1. Bonds are recorded at Par, with premium being amortized and subtracted from NI, so it causes NI to go down. Discount bond has opposite efect. At par bond, affects NI only in terms of interest paid. 2. like map1 said. 3. floating rate bonds adjust with changes in interest rates. So, if it is LIBOR + 1%, then it will track LIBOR. There could also be caps and floors for protection of issuer or investor.

don’t change the YTM, and keep the coupon. what’s the difference?

The interest expense flow thru income statement and where does the coupon go? I assume that is cash interest expense as well? Sorry bear with me on this one. S

You don’t get to record both coupons and interest expense, only the interest expense. The difference between the coupon payment and the interest expense goes to ammortize the discount or the premium from the face.

map1 Wrote: ------------------------------------------------------- > don’t change the YTM, and keep the coupon. what’s > the difference? difference is .8219 which is used to lower the book value of the premium

If you keep YTM constant and you decrease the coupon, you will see that the IE of a premium bond is higher than than of a discount bond, and that’s kind of all that is to it. You don’t compare IE of a discount versus a premium changing YTM.

If i decrease the coupon then the bond becomes a discount bond

do you have an example?

Out of the 3 elements of a bond, only one gets changed to allow for comparison. But if you change YTM, how would you have a correct basis to interpret interest expense?

IE depends on proceeds. So, with a discount bond proceeds are less, thus less interest.

Lets take yours: lets say you have a 5% bond that pays annually, 4%YTM when issued, and its a 5-yr FV=100 pmt=5 YTM=4 5=n CPT PV=104.4518 IE= 4%*104.4518=4.17 which is less than the coupon (the difference ammortizes the gain, the premium from face) lets say you have a 3% bond that pays annually, 4%YTM when issued, and its a 5-yr FV=100 pmt=3 YTM=4 5=n CPT PV=95.5482 IE= 4%*95.5482=3.82 which is higher than the coupon, the difference ammortizes the loss (the discount from face)