Level I CFA: Non-current (Long-Term) Liabilities-Lecture 1 

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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

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.

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

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

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

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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.

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?

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.

This video is applicable to 2019. IFT support team

See 1st lecture on quantitative methods for that.

PV = FV / (1+r) or you can use the calculator. IFT Support Team

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

Its applicable for 2021. For best access we recommend that you sign up for the free videos package: ift.world/product/june-free-package/ IFT Support Team

+ 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).

Yes it is. IFT support team

Yes it is part of the level 1 free videos package available at: ift.world/product/june-free-package/ IFT support team

Yes. IFT Support Team

Please write to support@ift.world and tell us which excel files you are referring to. Thanks. IFT Live Class Installment Instructions

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

Here is the link to the open group on linked-in: www.linkedin.com/groups/8382041/ IFT support team