Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

11. Long Term Liabilities

Introduction to Bonds and Bond Characteristics

Financial Accounting

11. Long Term Liabilities

Introduction to Bonds and Bond Characteristics

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Multiple Choice

Why does a bond's value fluctuate over time?

Because the bond issuer can change the face value at any time.

Because changes in market interest rates affect the present value of the bond's future cash flows.

Because bonds are always redeemed at a premium before maturity.

Because the bond's coupon payments increase each year.

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Verified step by step guidance

Understand the concept of a bond: A bond is a fixed-income security that represents a loan made by an investor to a borrower, typically corporate or governmental. It includes periodic coupon payments and a face value repaid at maturity.

Recognize the relationship between market interest rates and bond values: When market interest rates change, the present value of the bond's future cash flows (coupon payments and face value) is affected. This is because the discount rate used to calculate the present value is tied to the prevailing market interest rates.

Learn the formula for bond valuation: The value of a bond is the sum of the present value of its coupon payments and the present value of its face value at maturity. The formula is: \( P = \sum_{t=1}^{n} \frac{C}{(1 + r)^t} + \frac{F}{(1 + r)^n} \), where \( P \) is the bond price, \( C \) is the coupon payment, \( F \) is the face value, \( r \) is the market interest rate, and \( n \) is the number of periods until maturity.

Understand why bond values fluctuate: If market interest rates increase, the discount rate \( r \) increases, reducing the present value of the bond's future cash flows, and thus the bond's price decreases. Conversely, if market interest rates decrease, the bond's price increases.

Clarify misconceptions: The bond issuer cannot change the face value arbitrarily, coupon payments do not increase each year unless specified in the bond terms, and bonds are not always redeemed at a premium before maturity. The primary reason for bond value fluctuation is the impact of market interest rates on the present value of future cash flows.