Level I CFA: Non-current (Long-Term) Liabilities-Lecture 1
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- เผยแพร่เมื่อ 18 ก.ย. 2024
- This is Reading 28 for the 2021 exam
This CFA exam prep video lecture covers:
Bonds payable
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22:23 Discounted bond many details are skipped on the impact in the financial statements, double entries it would be recommended in order to let the audience understanding.
I am sure many of them are lost for missing those mentioned details.
Overall the video is very good but only for people with an advanced level of accounting
As per case 3, 16:20, Why would investor require 9% return when the company is ready to pay 10%?
The company is paying more than required rate of return, so for obvious reasons the bond will be in higher demand and it will issued at a premium
Just require a rather intuitive clarification.. When we say at 22:18 that the company is actually paying 10.00 as interest payment but it shows on income statement an expense of 10.73 in year 2011.. what is the overall take away/lesson to learn from this example ? Is it that companies actually pay less interest than they show? From what I understand it doesn't really matter because even if it shows 10.73 as interest expense, in 2013 it is going to payback 100 Face Value which compensates for the difference in interest rate ..
Dear Nouman,
In Income statement you as a company needs to reflect that you are paying 11%, that is, $10.73 interest expense. But the actual cash flow is 10%, that is, $10.When a company issues bond with a coupon rate less than the prevailing interest rate, investors are likely to pay less than the face value of the bonds. By doing so, investors earn a greater return on their reduced investment. If so, the issuing company amortizes the amount of this reduced payment (i.e. interest expense minus interest payment) over the term of the bonds, which increases the amount that the business records as interest expense. The net result is a total recognized amount of interest expense over the life of the bond that is greater than the amount of interest actually paid to investors. The amount recognized equates to the market rate of interest on the date when the bonds were sold.
IFT Support Team
For sum @ 22:18, we are expensing 10.73(Int exp) which is already in excess of 10(Int paid) by 0.73. I don't understand the logic of amortizing such 0.73 again over the life of the bond.
Sir, my question to you is, the rate required by the market keeps changing over the life of the bond, so does the issuing company incorporate it into its financial statements or is it only concerned about the rate during the time of issuance?
Concerned only about the rate during the time of issuance
When market rates change, the bond’s fair value diverges from carrying value. When market rates decline, the fair value of a bond with a fixed coupon rate increases, and vice versa. A company selecting this option will report gains/losses when market rates increase/decrease. You can refer to section 2.3 of the CFAI curriculum.
IFT Support Team
Bond is issued in 2011, and maturity is in 2013, then shouldn't there be only 2 periods? First interest payment in 2012, second in 2013. that's it.
Dear Jatin,
The bond is issued at the start of 2011 and expires at the end of 2013 (you can understand it by thinking of it as expiring at the start of 2014), hence there are 3 periods.
IFT Support Team
I didn't pick earlier that bond was issued at the 'start' of 2011. Doubt cleared. Thank you.
Hi Sir, is this video applicable for Dec 2019 exams? I'm asking because there has been some changes in the treatment of operating leases, right?
This video is applicable to 2019.
IFT support team
Every investor will have different Marist yield or market interest rate requirements so how does the company calculate the media rate and how it maintain the same rate over a period of time as the market interest rate can fluctuate
Dear Saith,
If we understand your question correctly, you are asking about how come coupon rates on a bond are fixed and what happens when interest rates change. So the answer is quite simple: Bonds are traded at a discount or a premium because of interest rates fluctuations.
IFT Support Team
When the company issues bond on discount , then why on the Balance sheet Bonds payable will be equal to issue price, when the actual liability is the par value(face value) ?
Dear Sagar,
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The issue price is the sum of the PV of the face value of the bond + future cashflows (i.e. coupon payments), hence the issue price would be used as the value of the liability.
Hi sir. i got confused because when i calculated the PV i got a different answer to yours.
PV= FV/(1+r)^n looking for this example 100/(1+0.11)^1= 90.1. i don't know what is wrong.
You are using formula of a zero-coupon bond. It is a coupon paying bond and PV will be calculated as N = 3, I/Y = 11, PMT = 10, FV = 100, CPT PV = 97.56
IFT support team
@@IFT-CFA Hi, I am also confused. May you answer with the exact formula? Thanks a lot.
Thanks
What happens if a company wants to raise $100 to finance particular expenditure but proceeds become $98 after increase in rates? Is this just part of the risks of raising funds through bond issuance as opposed to getting direct financing from a bank loan?
Dear Ashley,
Yes, usually the company will get an Investment bank to underwrite the issue, to reduce this risk.
IFT Support Team
IFT you guys are great. Thank you
Dear Ashley,
Thank you.
IFT Support Team
another doubt here - why wouldn't every investor pay less than the par value so they get a higher return (even on those companies which they perceive as stable and less risky for which they are willing to buy the bond at premium)
how would the underwriter help particularly?
Hi Sir, Why is it that issuers won’t call bonds at a price higher than the market price of the bonds? [CALLABLE BONDS]
When interest rates decrease, the bond’s marker price will increase. If the price increases to a level higher than the call price, the issuer can the bond, i.e. buy them back from the bondholders at the lower call price and refinance loan at a lower cost.
So, a company should call the bond when the market value is higher than the call price. But no investor will accept to pay more than the call price for the bond. Hence, a bond is usually called when the market price reaches the call price, that is, neither less no more than that.
Because a call feature puts the investor at a disadvantage, callable bonds carry higher yields than noncallable bonds, but higher yield alone is often not enough to induce investors to buy them. As further inducement, the issuer often sets the call price (the price investors must be paid if their bonds are called) higher than the principal (face) value of the issue. The difference between the call price and principal is the call premium.
IFT support team
Hi, for 13.17, my present value is -129.60 instead of 97.56. why is it so? I have been following all the numbers provided. I realise i have been getting all the wrong numbers for the bond issuance questions. I am using BA II plus calculator and its at END MODE. Appreciate your help.
+ and − signs: Make sure that the signs of PMT and FV are the same, and opposite to the PV. Don’t enter (+) for FV and PV, for example, as it will trigger Error 5 (i.e. no solution exists).
Is Fixed Incom covered in IFT L1 free course?
Yes it is part of the level 1 free videos package available at:
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sir good day! im a little bit confused can you drop the detailed formula of pv please
See 1st lecture on quantitative methods for that.
PV = FV / (1+r) or you can use the calculator.
IFT Support Team
I'm learning for Level 1 Dec from topics with higher weights to lower weights. As such, I haven't had the chance to go through quantitative methods yet. Is it a good idea to learn how to do PV or FV etc before I delve into this topic?
Or, for this topic can I leave quantitave methods for later studying?
Dear Stan,
We will suggest you to study quantitative methods (complete Topic) first. A lot of concepts in quantitative methods will prove to be helpful in other topics.
IFT Support Team
Is this video applicable for feb 2021?
Its applicable for 2021. For best access we recommend that you sign up for the free videos package:
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IFT Support Team
Hi! Is this lecture applicable for Dec'20?
Yes.
IFT Support Team
Is this lecture applicable for Feb2021?
Yes it is.
IFT support team
Why are we multiplying 11% with carrying (beg), why not 100?
hello, can i access the excel files?
Please write to support@ift.world and tell us which excel files you are referring to. Thanks.
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Can you provide the link to google group?
Here is the link to the open group on linked-in:
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