You are by far the best instructor I have ever come across!!! I only seek out your videos now! So many professors make the mistake of only showing how to do the steps in a problem, but fail to help students understand the whole picture. For instance, I've always wondered why a business would even bother calculating premiums or discounts if a new one can just be made. You explained why and it makes sense. Obviously, I've never had experience with debt securities and how they generally work. Those are the little things that I must know or it bugs me. :) Thank you for making all the videos! They are so well articulated and I enjoy watching them all! I absolutely love anything related to accounting.
Thank you for the kind words Alicia! Wonderful stories like this are what inspire me to make videos. I admire your hard work and diligence in learning the material, and I'm confident you will go on to a very successful career!
Thank you so much for the perfectly clear explanations! These videos are the first thing I am watching before even reading the textbook! I wish my professors also had a talent to explain accounting concepts this well!
Thank you so much. Im studying for EA exam. I love your videos and the way you explained. Finally I could understand it. Btw, your life story and mission are so inspiring. Once I am done raising my kids, I will give back to the world like you. Thanks for everything. Please post more videos. May the karma of your goodness come back to you with many more blessings in life.
Thank you for such a kind note. I hope you pass the EA exam! You sound like a great parent, and I bet your kids are proud of the hard work you are putting in to give them a good life!
Absolutely wonderful video and a great learning tool--thank you. There is one minor tweak to consider. At time 8:45 the credit is to "Premium" is $52,486. There is now an account in the company's accounting records called "Premium" with a credit balance. When the bond matures, the balance in the premium account should be zero since it will be amortized over the life. At time 12:15 there is a debit to an account called "Amort. Premium". To be 100% correct, the debit should be to an account called "Premium", which is the exact same account at 8:45. Therefore, the balance in the Premium account is reduced annually by the amortized premium until the balance in Premium is zero in the year the bond is matured. A T-Account for the Premium account clearly demonstrates this.
right. that makes sense, the ledger account is called "premium" but the +/- adjustment to both the Premium and BV account is called Prem Amort. Do you know if there is some type of distinguising difference between the Cash Carry Value and GAAP Book Value for this type of non callable bond?
This video is useless until the viewer understands the essence of "the Present Value of Annuity formula". This makes it easier to understand where the premium comes from.
Hi Edspira, This is an excellent video content and helped to get clarity after 15 years of waiting. The way you explained the content is like a dad teaching his kid at the age of 1. Amazing! Keep up the good work and God bless you always.
Interesting. Exactly the same calculations as for an ordinary annuity of 3 payments of 90,000 and a balloon payment of 1,000,000. Inputting 7% and solving for PV with a financial calculator produces the initial carrying value and you can use the calulator's amortization function for the amortization schedule as well.
Sir when it says annually, it means that you use single payment right since annually means it should be payed once because annually = 1. But then when it says semi annually it means its payed twice and yet the formula to be use (annuity due or ordinary annuity) is based on a phrase stated either "at the end" for the ordinary annuity and "due of the date" for the annuity due.
Thank you for your video. Really helpful! But I still have a question. If the interest fees are paid semiannually, when I caluculate pv of principal, does it need to be 1000000/(1.07)^6 or 1000000/(1.035)^6?
@Edspira You mentioned "Cash Paid" and then we see "Interest Expense". May I ask what do we in the Income Statement and Cash Flow Statement from Financial Activities?
Is the issuer receiving the "proceeds" from the bond? Is the issuer making money off of the bond? If so, I might just start issuing bonds at a premium (if all goes well).
sometimes i wonder why schools try to overcomplicate material. If you can't explain something to a 5 year old, it means you don't understand it well enough. Thank you! The concept is so simple, if you're paying higher stated interest, you should get more cash . If you're paying less interest *because it was too bothersome to match stated rate to market rate*, you should get less cash.
Hey Michael .. you mean about the carrying value of the bond is the bond face/par value plus the premium ? because i supose that the bond T account will only content the 1MIL at the beginning of the transaction ? and how it will be presented at the balance sheet bond and premium saperated or combined ? .. thanks for the video man.
You are absolutely correct! The carrying value is the face value of the bond (the amount to be repaid when the bond matures) plus any unamortized premium (if the bond was issued at a discount, it would be the face value minus any unamortized discount). Many accounting textbooks show the unamortized discount or premium separately from the bond payable on the balance sheet, although many firms just show the net amount on their actual balance sheet
based on market interest you get to know whether it is trading at a discount or at a premium.. if stated rate is equal to market rate, the bond is trading at par.. if the stated is more than market rate, the bond is trading at a premium.. if the stated rate is less than market rate, the bond is trading at a discount.. hope it helps.. :)
I don't get this. So for period 1 wouldn't the total expense be the sum of the interest expense and the cash payout. I guess i am missing the concept. Is the amortization an income??
The stated rate is only used to determine the interest payments. When you are calculating the present value, you want to use the market rate. You are basically converting the bond to the current market rate, so you want to calculate the actual value of the interest payments and principal using the market rate.
not sure what "stated rate" is. there is a coupon rate of 9% and the market rate is 7% in this example...it represents a market consistent benchmark rate for this particular issuers credit risk by soverign, geography, industry and rating and the term of the bond. when cashflows are discounted at a market consistent rate the sum of those cashflows can be refered to as the arbitrage-free "Fair Market Value" which he's calling the PV of the bond.
Sir, what if the amount paid isn't given? I knew it before but im kinda lost. We have a bsnssmath subject. And i need to know it now bc we have a quiz tomorrow sir please help me.
What happen if market interest rate increase from 7% to 8% at Beginning of year 3th (Jan 1, 2020)? Do we still using 7% market interest rate to calculate the bond interest expense for year 3th?
Hey. Short Answer Yes. Great question! At first I was thinking that as well. Pretty sure since the 7% rate is the yield at issue and that's the only rate that determines the fair market value at issue, we should carry forward that 7% rate for determining the premium amort schedule. On other hand, the current market yield (in your example 8%) at a particular time T probably would be used to determine a market value at time T ( i.e. at time 3, if market yield was now like 8% or something, I guess the difference between between the amortized carry value and the market value would be an unrealized gain/loss) I believe the carry value is essentially like Par, in the fact that it's a unitized value based only on price at issue, hence the need to amortize it back to PAR. For example, book value and market value are also calculated in a schedule but they would roll down based off of whatever the book yields and market yields would be. My confusion has always been what's the difference between the book Yield and this 7% market rate at issue. I'm also aware market yields certainly change over time. I believe the book yields can change but only if there is activity like principle paydown, prepay risk, impairment, etc. This is why the book value is sometimes different than the carry value.
damn, simply, if market rate is higher, then it is a discount and if the stated rate is higher, then it is a premium, why my professor explained it in a more difficult way ti understand
Omg this is so much easier to understand than the Text books. Thank you so much.
You are by far the best instructor I have ever come across!!! I only seek out your videos now! So many professors make the mistake of only showing how to do the steps in a problem, but fail to help students understand the whole picture. For instance, I've always wondered why a business would even bother calculating premiums or discounts if a new one can just be made. You explained why and it makes sense. Obviously, I've never had experience with debt securities and how they generally work. Those are the little things that I must know or it bugs me. :) Thank you for making all the videos! They are so well articulated and I enjoy watching them all! I absolutely love anything related to accounting.
Thank you for the kind words Alicia! Wonderful stories like this are what inspire me to make videos. I admire your hard work and diligence in learning the material, and I'm confident you will go on to a very successful career!
Studying for the CPA exam and this was tripping me up. Great explanation.
My textbook completely ignored how to calculate the premium... Went straight to the schedule 😔
Thank you so much for this!
Thanks for the videos sir. The next generation of businesspeople will effectively be created by people like you.
Thank you so much for the perfectly clear explanations! These videos are the first thing I am watching before even reading the textbook! I wish my professors also had a talent to explain accounting concepts this well!
Thank you so much. Im studying for EA exam. I love your videos and the way you explained. Finally I could understand it. Btw, your life story and mission are so inspiring. Once I am done raising my kids, I will give back to the world like you. Thanks for everything. Please post more videos. May the karma of your goodness come back to you with many more blessings in life.
Thank you for such a kind note. I hope you pass the EA exam! You sound like a great parent, and I bet your kids are proud of the hard work you are putting in to give them a good life!
I haven’t made any money trading bonds yet but I’m definitely interested in getting started.
Thanks for making this simple and concise. You did in 15 minutes what my teacher couldn't do in hours!
Glad it helped!
Absolutely wonderful video and a great learning tool--thank you. There is one minor tweak to consider.
At time 8:45 the credit is to "Premium" is $52,486. There is now an account in the company's accounting records called "Premium" with a credit balance. When the bond matures, the balance in the premium account should be zero since it will be amortized over the life. At time 12:15 there is a debit to an account called "Amort. Premium". To be 100% correct, the debit should be to an account called "Premium", which is the exact same account at 8:45. Therefore, the balance in the Premium account is reduced annually by the amortized premium until the balance in Premium is zero in the year the bond is matured. A T-Account for the Premium account clearly demonstrates this.
right. that makes sense, the ledger account is called "premium" but the +/- adjustment to both the Premium and BV account is called Prem Amort.
Do you know if there is some type of distinguising difference between the Cash Carry Value and GAAP Book Value for this type of non callable bond?
brilliant explanation of bond amortization, BRILLIANT teacher, thanks allot
Wow, thank you so much!
Thank you for teaching with such a simplicity, best instructor you are.
When I'm totally stumped, I kick myself for not searching out your videos sooner. It always clicks.
This video is useless until the viewer understands the essence of "the Present Value of Annuity formula". This makes it easier to understand where the premium comes from.
Hi Edspira, This is an excellent video content and helped to get clarity after 15 years of waiting. The way you explained the content is like a dad teaching his kid at the age of 1. Amazing! Keep up the good work and God bless you always.
Thank you for such a kind compliment!
I wish you taught for Becker! Thank you for putting these videos together. They are so helpful!
Very good explanation! I have been watching your videos for ever. You explain things in detail and it makes so much more sense. Thanks!
Carolina Gomez, Thanks so much for watching the videos. Best of luck to you in your studies!
9 mins before my exam life saver my guy
CFA?
Edspira, you are the best, thank you so much for this !
No problem 😊
This is some excellent content. Thank you so much, I cannot fully express how much this helped me!
Thank you so much for this, you really made simpler than i thought it would be.
You’re welcome 😊
Thanks! The explanation is simple and easy to follow.
God bless you. Thankyou this clears up all confusions. Cheers
If I am not mistaken, you used the market rate both for the PV of Int payments and PV of Principal
very brilliant well explained this will gonna help me for my tomorrow exam
Present value of interest is still confusing. Can you explain that formula a little bit.
Your explanation is precise. Thank you very much.
Interesting. Exactly the same calculations as for an ordinary annuity of 3 payments of 90,000 and a balloon payment of 1,000,000. Inputting 7% and solving for PV with a financial calculator produces the initial carrying value and you can use the calulator's amortization function for the amortization schedule as well.
Thank you for this. Looking forward on how to retire a bond.
Much easier waw. You are a great teacher. I love the table
You are amazing; My favorite professor!!
you are saving my career
Sir when it says annually, it means that you use single payment right since annually means it should be payed once because annually = 1. But then when it says semi annually it means its payed twice and yet the formula to be use (annuity due or ordinary annuity) is based on a phrase stated either "at the end" for the ordinary annuity and "due of the date" for the annuity due.
Please correct me sir if im wrong.
Awesome presentation!
Life saver! This guy is awesome.
Thank you! I think hard-working students like you are awesome!
Super well explained ! It couldn`t be better, Thank you a lot !
Thank you!
You're amazing. Thank you so much for your videos!!!!
whats the point of college anymore? Thank you Edspira.
No problem!
Thank you for your video. Really helpful! But I still have a question. If the interest fees are paid semiannually, when I caluculate pv of principal, does it need to be 1000000/(1.07)^6 or 1000000/(1.035)^6?
Perfectly explained thank you
Happy to help! Best wishes :)
This is the best video. I am rescued.
very comprehensive explanation..
@Edspira You mentioned "Cash Paid" and then we see "Interest Expense". May I ask what do we in the Income Statement and Cash Flow Statement from Financial Activities?
Thank you for the well-explained video, definitely will help in my exam!
this is the best explanation thank you soo much !
Thank you for the kind words!
Thank you for your all beautifully explained videos.
Thank you it's much help
Is the issuer receiving the "proceeds" from the bond? Is the issuer making money off of the bond? If so, I might just start issuing bonds at a premium (if all goes well).
Excellent video! Easy to understand
This video was so helpful!!!
+Zaid Parekh Thanks!
Great video. Can I ask, what is the program you are using for instruction? It seems to be a common one. Thank you.
sometimes i wonder why schools try to overcomplicate material. If you can't explain something to a 5 year old, it means you don't understand it well enough. Thank you! The concept is so simple, if you're paying higher stated interest, you should get more cash . If you're paying less interest *because it was too bothersome to match stated rate to market rate*, you should get less cash.
Hey Michael .. you mean about the carrying value of the bond is the bond face/par value plus the premium ? because i supose that the bond T account will only content the 1MIL at the beginning of the transaction ? and how it will be presented at the balance sheet bond and premium saperated or combined ? .. thanks for the video man.
You are absolutely correct! The carrying value is the face value of the bond (the amount to be repaid when the bond matures) plus any unamortized premium (if the bond was issued at a discount, it would be the face value minus any unamortized discount). Many accounting textbooks show the unamortized discount or premium separately from the bond payable on the balance sheet, although many firms just show the net amount on their actual balance sheet
What happens if the market interest rate changes? Do we still use the 7% or do we calculate a new carrying value for the bond?
Someone should please answer this
based on market interest you get to know whether it is trading at a discount or at a premium.. if stated rate is equal to market rate, the bond is trading at par.. if the stated is more than market rate, the bond is trading at a premium.. if the stated rate is less than market rate, the bond is trading at a discount.. hope it helps.. :)
I guess we still use the market interest rate @ the issuance i. e. 7% here
Great video, thanks a lot!
Glad you liked it!
Wow thanks. If my profesor be theaching like you everyone got just A all the time👍
Absolute Legend. Thank you so much
Tank you very much
now I am ok to do my home work
Thank you so much for the amazing explaining!
Is this considered the effective interest method?
THANKKKKK YOUU!!!!!!! GOD BLESS YOU GOOD SIR!!!!!!!!!!!
Glad it helped!
thank you for the very clear explanation!
I got my EA>CPA and no need to do schooling.
Thank you Professor!
my idol, my lifesaver.
Quick question for anyone who may know but how does a semi annual payment affect the formula for PV of interest payments? Thank you.
The best, Thank you !!
+Joepdj Thank you for the kind words!
Very simplified..thanks..
No problem! Take care :)
I don't get this. So for period 1 wouldn't the total expense be the sum of the interest expense and the cash payout. I guess i am missing the concept. Is the amortization an income??
In the PV of interest payments, is it always multiplied by the annual interest (90,000) or by whatever the period is? (semiannual, quarterly)
I keep getting a negative number when calculating the PV of Interest too.
Really great video! Thank you.
If we weren't given the "102" how would we calculate so that we can get the 102
its the PV of CFs using 7% market rate at issue
If the accounting period ended in between two payments, for example, middle of 2017, would you debit the premium on bond account in this case?
My savior
_(Mississippi accent)_ Much obliged.
Thank you
Thank you so much!!!
Where does the Premium account fit on the balance sheet?
Great ! Thank you 😊
Hey guys I need help... how do I account for a premiums of redeemable bond when calculating WACC? What method do I use? Irr or hawinini
Thank you very much. It's been very helpful 🤓🤓🤓
Thank you for this video.
Could you please explain me those second Present value formula that you are using ? I cant get it
thanks
The first time in my life I get bonds.
you are my hero
Michael never divulges why we use the market rate when calculating PV principal and PV interest payments. :-(
The stated rate is only used to determine the interest payments. When you are calculating the present value, you want to use the market rate. You are basically converting the bond to the current market rate, so you want to calculate the actual value of the interest payments and principal using the market rate.
yes, but you used the stated rate for both the calculations of pv principle and pv interest in the video
not sure what "stated rate" is. there is a coupon rate of 9% and the market rate is 7% in this example...it represents a market consistent benchmark rate for this particular issuers credit risk by soverign, geography, industry and rating and the term of the bond. when cashflows are discounted at a market consistent rate the sum of those cashflows can be refered to as the arbitrage-free "Fair Market Value" which he's calling the PV of the bond.
Sir, what if the amount paid isn't given? I knew it before but im kinda lost. We have a bsnssmath subject. And i need to know it now bc we have a quiz tomorrow sir please help me.
What happen if market interest rate increase from 7% to 8% at Beginning of year 3th (Jan 1, 2020)? Do we still using 7% market interest rate to calculate the bond interest expense for year 3th?
Hey. Short Answer Yes. Great question! At first I was thinking that as well. Pretty sure since the 7% rate is the yield at issue and that's the only rate that determines the fair market value at issue, we should carry forward that 7% rate for determining the premium amort schedule. On other hand, the current market yield (in your example 8%) at a particular time T probably would be used to determine a market value at time T ( i.e. at time 3, if market yield was now like 8% or something, I guess the difference between between the amortized carry value and the market value would be an unrealized gain/loss) I believe the carry value is essentially like Par, in the fact that it's a unitized value based only on price at issue, hence the need to amortize it back to PAR.
For example, book value and market value are also calculated in a schedule but they would roll down based off of whatever the book yields and market yields would be. My confusion has always been what's the difference between the book Yield and this 7% market rate at issue. I'm also aware market yields certainly change over time. I believe the book yields can change but only if there is activity like principle paydown, prepay risk, impairment, etc. This is why the book value is sometimes different than the carry value.
Awesome !!! Thanks a lot mate !!
damn, simply, if market rate is higher, then it is a discount and if the stated rate is higher, then it is a premium, why my professor explained it in a more difficult way ti understand
Awesome, thank you so much
Thanks !
Thank you!!!
No problem.
THANK YOU KEEP GOING
Will do!
whole lotta red on my test
Thank you very much for this!
Thank you