Lake Pushkar

Lyons Document Storage Corporation:

Bond Accounting

By

S.Vijay Ganesh (WPM 15 VIJ)

Malikaa (WPM15MAL)

Sriram Ramakrishnan ( WPM 15 SRI)

Mahesh Gurumoorthy( WPM 15 MAH)

1) A) Lyons Document Storages Controller, eric Petro told the Rene that bonds

were issued in 1999 at a discount and that only approximately $ 9.1 Million was

received in Case. Explain what is meant by the term premium or Discount as they

relate to bonds.

Analysis: Lyons Document Storage Issued the bond for $ 10 Million with the Par Value

of $ 1000, Coupon Rate of 8% in 1999, during that Period Investors was demanding 9%.

Hence Investors were bid only for $ 908.24. Bond was sold at $ 908.24 against the par

value of $ 1000. Hence it is known as discount Bond. When the Price of the Bond is

higher than the Par Value, Then Bond is known as Premium Bond. Premium Bond or

Discount Bond Occurs only when there is difference arises between Coupon Rate &

Market Interest Rate (expected Rate). Regardless of the Market Interest Rate, Bond

Price will reach the Par value of the Bond when it reaches the Maturity Period.

b) Compute exactly how much the company received from its 8% bonds if the rate

prevailing at the time of Original Issue was 9% as indicated in Exhibit 2.

Par Value $ 1000

Coupon Rate 8%
Maturity 20 Years
Required rate 9%
Coupon Payment $ 80

PVIFA(9%, 20 Years) $ 730.24

PVIF( 9%, 20 Years) $ 178
Bond Price $ 908.24
Total Bond Amount Collected (10,000 Bonds) $ 9.1 Million

Liability at
Liability at Interest at the end of Liability
the Beginning 4.5% (semi Period before at the end
Year of Period annually) Payment Payment of Period
02-07-2006 (Dec06) $92,31,829 $4,15,432 $96,47,261 $4,00,000 $92,47,261
02-07-2007
(Dec07) $92,63,388 $4,16,852 $96,80,240 $4,00,000 $92,80,240
C) The recomputed amount in the balance sheet in December, 2006 and December, 2007

are $ 92, 47,261 and $ 92, 80,240.

D) Current market Value of the bonds outstanding at the current effective Interest rate

of 6%.

Par Value $ 1000

Coupon Rate 8%
Maturity 20 Years
Required rate 6%
Coupon Payment $ 80

PVIFA(6%, 10.5 Years) $ 609.88

PVIF( 6%, 10.5 Years) $ 542.50
Bond Price $ 1152.40
Total Bond Amount Collected (10,000 Bonds) $ 11.52 Million

2) If you were Rene Cook, Would you recommend issuing $ 10 Million, 6% Bonds on

Jan 2, 2009 and using the Proceeds and Other Cash to Refund the existing $ 10 Million,

8% Bonds? Will it cost more in terms of Principal and Interest Payments, to keep the

existing bonds or to Issue New Ones at a Lower Rate? Be prepared to discuss the Impact

of a Bond Refunding on the Following Areas like Cash Flow , Current Year Earnings,

Future Year Earnings.

New Bond Issuing:

Par Value $ 1000

Coupon Rate 6%
Maturity 10 Years
Required rate 6%
Coupon Payment $ 60

PVIFA(6%, 10.5 Years) $ 442

PVIF( 6%, 10.5 Years) $ 558.
Bond Price $ 1000.00
Total Bond Amount Collected (10,000 Bonds) $ 10 Million
By Issuing New Bond, Company can collect $ 10 Million. To Repay Old bond, Company

has to pay $ 11.52 Million. Difference amount of $ 1.52 need to be paid from Retained

Earnings. This is additional Expense for the Company.

Balance Sheet ( Liabilities & Share Holder Equity Position) ( Issuing New Bond for $ 10 Million)
Units in 000
Particulars 2009 2008 2007 2006 Remarks

T.Current Assume: No Change in

Liabilities $12,995 $12,995 $12,995 $12,704 Current Liabilities

Long Term
Debt $10,000 $9,356 $9,316 $9,247 Due to New Bond

No Significant Change in in
Total Liabilities $22,995 $22,351 $22,311 $21,951 Liabilities

Share holder
Equity

Common
Shares $2,838 $2,838 $2,838 $2,838

Additional Paid
In Capital $75,837 $75,837 $75,837 $75,837
Assume :a) No Change in
Retained Earning
Retained b) 1523.8 (in Thousand paid
Earning $1,49,755 $1,51,279 $1,51,279 $1,46,530 to Old Bond Investors)
Total
Shareholders No Significant Change in
Equity $2,28,430 $2,29,954 $2,29,954 $2,25,205 Shareholders Equity

Total Liabilities
& Shareholders
Equity $2,51,425 $2,52,305 $2,52,265 $2,47,156

Retained Earnings will be Reduced by $ 6,00,000 in 2010 due to Coupon( Interest) Payment. If
the Company Retain the Earning (assume $ 1,49,755,000). Then Final Retained Earnings will be
$ 1, 49,155,000 after deducting the Interest Payment.
If Company Stick to Ongoing Bond (Cash Flow will be as below). Present value of

annuity & Lump Sum amount is calculated below

Coupon
Payment Present Value of Payment Present Value
No of (semi (Dis.rate 3% semi of Final
Year Payment annually) Annually) Settlement
$3,88,350
02-07-2009 1 $4,00,000
$3,77,038
02-01-2010 2 $4,00,000
$3,66,057
02-07-2010 3 $4,00,000
$3,55,395
02-01-2011 4 $4,00,000
$3,45,044
02-07-2011 5 $4,00,000
$3,34,994
02-01-2012 6 $4,00,000
$3,25,237
02-07-2012 7 $4,00,000
$3,15,764
02-01-2013 8 $4,00,000
$3,06,567
02-07-2013 9 $4,00,000
$2,97,638
02-01-2014 10 $4,00,000
$2,88,969
02-07-2014 11 $4,00,000
$2,80,552
02-01-2015 12 $4,00,000
$2,72,381
02-07-2015 13 $4,00,000
$2,64,447
02-01-2016 14 $4,00,000
$2,56,745
02-07-2016 15 $4,00,000
$2,49,267
02-01-2017 16 $4,00,000
$2,42,007
02-07-2017 17 $4,00,000
$2,34,958
02-01-2018 18 $4,00,000
$2,28,114
02-07-2018 19 $4,00,000
$2,21,470
02-01-2019 20 $4,00,000
$2,15,020
02-07-2019 21 $4,00,000

02-07-2019 21 $31,22,544
Sum $84,00,000 $61,66,010
Present value of an Annuity & Single Lump Sum $92,88,553
If Company Plan to go with issuing New Bond for $ 10 Million , Coupon rate 6%,
Market Expected rate is 6% (Cash Flow will be as below). Present value of annuity &
Lump Sum amount is calculated below

Present Value of Present Value

No of Coupon Payment (Dis.rate of Final
Year Payment Payment 3% semi Annually) Settlement
02-07-2009 1 $3,00,000 $2,91,262
02-01-2010 2 $3,00,000 $2,82,779
02-07-2010 3 $3,00,000 $2,74,542
02-01-2011 4 $3,00,000 $2,66,546
02-07-2011 5 $3,00,000 $2,58,783
02-01-2012 6 $3,00,000 $2,51,245
02-07-2012 7 $3,00,000 $2,43,927
02-01-2013 8 $3,00,000 $2,36,823
02-07-2013 9 $3,00,000 $2,29,925
02-01-2014 10 $3,00,000 $2,23,228
02-07-2014 11 $3,00,000 $2,16,726
02-01-2015 12 $3,00,000 $2,10,414
02-07-2015 13 $3,00,000 $2,04,285
02-01-2016 14 $3,00,000 $1,98,335
02-07-2016 15 $3,00,000 $1,92,559
02-01-2017 16 $3,00,000 $1,86,950
02-07-2017 17 $3,00,000 $1,81,505
02-01-2018 18 $3,00,000 $1,76,218
02-07-2018 19 $3,00,000 $1,71,086
02-01-2019 20 $3,00,000 $1,66,103
02-01-2019 20 $55,83,948
Sum $57,00,000 $41,71,980

Present value of an Annuity & Single Lump Sum $97,55,928

Expense from Issuing New Bond will be $ 22,07,546

Market Price of Old Bond $1,15,23,800

Liability at the end of 2008 $93,16,254
Difference - $22,07,546
Difference need to be Paid from Companys Reserve ( Loss for Company).

Saving from Issuing New Bond will be -$4,67,375

Present value of annuity & single Lump sum ( Old Bond) $92,88,553
Present value of annuity & single Lump sum ( New Bond of 10Million) $97,55,928
Difference -$4,67,375
Net Saving from Issuing New Bond will be - $26,74,921 ( - $ 0.267 Million).

There is not significant saving (only Loss due to the new bond).I would not

Suggest going for Issuing New Bond.

3) Assume 65 bonds could be issued and the Proceeds used to refund the existing
bonds. Compare the effects of these transactions with those calculated in Q2. If you are
Rene Cook, What amount of New Bonds would you recommend and why?

Balance Sheet ( Liabilities & Share Holder Equity Position) ( New Bond Issue -$ 11.54 Million)
Particulars 2009 2008 2007 2006 Remarks

Assume: No Change in Current

T.Current Liabilities $12,995 $12,995 $12,995 $12,704 Liabilities

Long Term Debt $11,524 $9,356 $9,316 $9,247 Due to New Bond

10% Change in Liabilities from

Total Liabilities $24,519 $22,351 $22,311 $21,951 Previous Year

Share holder Equity

Common Shares $2,838 $2,838 $2,838 $2,838

Additional Paid In
Capital $75,837 $75,837 $75,837 $75,837

Assume :a) No Change in Retained

Retained Earning $1,51,279 $1,51,279 $1,51,279 $1,46,530 Earning

Total Shareholders No Significant Change in

Equity $2,29,954 $2,29,954 $2,29,954 $2,25,205 Shareholders Equity

Total Liabilities & No Significant Change in Total

Shareholders Equity $2,54,473 $2,52,305 $2,52,265 $2,47,156 Liabilities & Shareholders Equity.

Retained Earnings will be Reduced by $ 6,92,000 in 2010 due to Coupon( Interest) Payment. If
the Company Retain the Earning (assume $ 1,51,279,000). Then Final Retained Earnings will be
$ 1, 50,587,000 after deducting the Interest Payment.
If Company Plan to go with issuing New Bond for $ 11.54 Million , Coupon rate 6%,

Market Expected rate is 6% (Cash Flow will be as below). Present value of annuity &

Lump Sum amount is calculated below

Present Value of Present Value

No of Payment (Dis.rate of Final
Year Payment Coupon Payment 3% semi Annually) Settlement
02-07-2009 1 $3,46,200 $3,36,117
02-01-2010 2 $3,46,200 $3,26,327
02-07-2010 3 $3,46,200 $3,16,822
02-01-2011 4 $3,46,200 $3,07,594
02-07-2011 5 $3,46,200 $2,98,635
02-01-2012 6 $3,46,200 $2,89,937
02-07-2012 7 $3,46,200 $2,81,492
02-01-2013 8 $3,46,200 $2,73,293
02-07-2013 9 $3,46,200 $2,65,333
02-01-2014 10 $3,46,200 $2,57,605
02-07-2014 11 $3,46,200 $2,50,102
02-01-2015 12 $3,46,200 $2,42,818
02-07-2015 13 $3,46,200 $2,35,745
02-01-2016 14 $3,46,200 $2,28,879
02-07-2016 15 $3,46,200 $2,22,213
02-01-2017 16 $3,46,200 $2,15,740
02-07-2017 17 $3,46,200 $2,09,457
02-01-2018 18 $3,46,200 $2,03,356
02-07-2018 19 $3,46,200 $1,97,433
02-01-2019 20 $3,46,200 $1,91,683
02-01-2019 20 $64,43,876
Sum $69,24,000 $51,50,582

Present value of an Annuity & Single Lump Sum $1,15,94,458

All amount to the Old Investors will be Paid through Issuing New Bond for

the same Value ( $ 11.54 Million) . Expense from Issuing New Bond will be $ 0.

Saving from Issuing New Bond will be -$ 23,05,905

Present value of annuity & single Lump sum ( Old Bond) $92,88,553
Present value of annuity & single Lump sum ( New Bond of 10Million) $1,15,94,458
Difference -$ 23,05,905
Net Saving from Issuing New Bond will be - $23,05,905 ( - $ 0.23 Million).

There is not significant saving (only Minor Loss due to the new bond).I would not

Suggest going for Issuing New Bond.