Masters in Finance

PREPARATORY ACCOUNTING

SESSION 4:

Bonds

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Question 1: (basic bond bookkeeping)

Assume that on the first day of 2020, Sensient Technologies, a manufacturer of specialty inks
and dyes, decides to raise capital by issuing bonds. The terms of the bond issuance are
described below.

∙ The bonds have a two-year life and mature at the end of 2021.
∙ For securities of similar risk, the annual market rate of interest on the date of issuance is
6%.
∙ For securities of similar risk, the annual market rate of interest at the end of 2021 is 5%.
∙ The stated (coupon) rate of interest is 4%.
∙ The face value of the bonds is $100,000.
∙ The bonds pay interest once a year.

A. Present the transaction that Sensient would record on the date of issue.

B. What annual rate of return will investors earn when they purchase the bonds from
Sensient on the date of issuance?

C. Present the transaction that Sensient would record at the end of the year.

D. Present the transaction that Sensient would record at the maturity date of the bonds.

E. Suppose that instead of allowing the bonds to go to maturity, on January 1, 2021,

Sensient repurchases the bonds on the open market. The required return on the bonds on
the date of repurchase is 5%. What entry would Sensient record for the redemption?

F. Suppose that instead of repurchasing the bonds on the open market on January 1, 2021,
Sensient does so on March 1, 2021. If the price of the bonds on the open market on
March 1, 2021 is $99,442.23, what entries would Sensient record for the redemption?

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Question 2: (zero-coupon bond calculations)

Lando Co. issues ten £1,000 face value bonds on January 1, 2021. The bonds have a twenty-
year term and 0% coupon (i.e., the bonds pay no cash interest). The market rate of interest is
5% at the date of issuance.

A. Calculate the value of the bonds on January 1, 2021.

B. Prepare the transaction Lando would record at the end of

to account for bond amortization. (Hint: You do not need to prepare ten years of entries.)