 Hello and welcome to the session in which we would look at valuing long-term debt specifically bonds. This example will put in practice the application of the time value of money, specifically the present value of a single payment, the present value of an annuity. The beauty about a bond, it encompass both application of time value of money with the present value, the single amount as well as the annuity. Now the same concept could be said about notes payable. Notes payable also is a long-term debt and notes payable usually it's a form of an annuity but the bond is it will encompass both the present value of a single payment, the present value of an annuity. So if you don't understand those two concepts from the prior session I suggest you stop go back and view them because this topic is covered on the CPA exam and covered heavily in your accounting intermediate advanced accounting courses so you want to make sure you are comfortable with it. 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connect with me on Instagram Facebook Twitter and Reddit so let's take a look at valuing bonds so let's the the best way to illustrate this is to take a look at an example let's assume Adam company issued 100,000 five year five percent bond paid annually it means the interest is paid annually simple English Adam wants to borrow 100,000 dollar they wanted to borrow this over a period of five years they're offering to pay five percent and they will pay the interest annually once a year now bear in mind the problem could say semi annually and I'm going to show you the difference that it makes if it's semi annually how you would approach this problem also we are told that the market rate for similar bond is six percent now I'm going to cover this briefly but this topic is covered a little bit more in depth in my bond chapter but what do I mean by market rate for similar bond is at six percent it means Adam is paying five Adam is offering five percent the market other similar companies which is we're going to call it the market similar to Adam are offering six percent they're offering a better rate so what's going to happen is this when creditors when investors wants to come to Adam to buy Adam's bond they're not going to pay the full amount of Adam they're going to pay less than 100,000 why because they are smart enough to figure out that why would why should we pay Adam the full amount if we can go somewhere else and get six percent if we're going to buy Adam's bond we're going to pay pay Adam less than 100 percent to be compensated to earn six percent so they want to earn six percent they like your bond but they still want to earn six percent because because they can go to the market and get the six percent so if they're going to buy your bond they want to earn six percent now why am I emphasizing this point I'm emphasizing this point is the reason is because when we go to discount discount the bond discount the payment discount the face value we're going to be using the market great and I would remind you when we do this but this is the reason why now how do we value a bond well the bond is there's a two part of a bond a bond it has two parts when you buy a bond you're going to be receiving payments one two three four five you're going to be receiving five payments so the first thing when you value a bond is you have to find out what is your interest payment how much you're going to be receiving and that's simple you will take the face value of the bond times the stated rate times the five percent equal to five thousand so this is how much the bond pay this is how much it pays in cash every year this amount is paid every year this amount is paid every year so we can put 5k 5k 5k 5k and 5k well this looks like an annuity well if it's an annuity we need to find the value of this annuity we're going to take this annuity and find the value of this annuity and equal to five it's a five period i equal to six percent so when I discount this annuity I want to earn six percent if I want to earn six percent it means I want to earn the market rate because Adam is not competitive this five thousand is not competitive I'm not willing I don't I don't want to be paid five percent I want to be compensated at six percent therefore what I pay for this for these payments is six percent now well I'm going to discount using the market rate here here says here's a shortcut every time you go to the tables you would use the market rate so remember this okay so in case you're not sure if there are two interest rates which interest rate do I use when I go to the to those tables the market rate because the investor wants to earn the market rate now we said i equal to six notice here i equal to six and equal to five and the factor is four point two one two four now I'm going to take my five thousand multiplied by four point two one two four and that's going to give me twenty one thousand twenty one thousand sixty two dollars so the value of those five payments today twenty one thousand and sixty two dollars now also I can show you that that's the case well you know I can you know invest this money now and take five thousand for the next five years I don't have to show you this because I showed it to you in the in the in the present value computation present value annuity but this is what we mean so this is one part of the bond so the annuity is one part of the bond the second part of the bond I'm going to put it in a different color is the face value at the end of the five years the investor will get their one hundred thousand dollar back they will get their face value well what we need to do we need to also discount this face value to the present well one hundred thousand again we have to discount it what what what rate do we use we use the market rate however the one hundred thousand we use the single the single payment because we only receive the one hundred thousand once so make sure you're using the proper table okay now again six percent is the rate five periods and the factor is point seven four seven therefore I'm going to take one hundred thousand times seven point seven four seven two which is going to give me seventy four thousand seven seven hundred and twenty well so what's the price of my bond well as I told you the bond is has two components an annuity component and a single payment component you combine those two and you will find the price of the bond now what I want to mention to you is this most bonds you will see later on that they pay interest semi annually so if we change this example to say the interest is paid rather than every year if we say semi annual well that's going to change a lot of things for one thing the payment the payment will be it will be one hundred thousand dollar times five percent times one half it will be two thousand five hundred that's one thing so the payment that we'll be receiving is two thousand five hundred the number of periods rather than using n equal to five now we have ten periods because it's five years but it's paid semi annually and rather than the six percent it will be three percent so when we go to the tables to discount everything to discount that two thousand five hundred we're going to be using three percent and we're going to be using ten periods which is three percent and ten periods then the factor will be point seven four four four and the same thing for the with the annuity when we go to the table we're going to be using three percent ten period that will be eight point five three zero two okay again the reason I'm showing you this because and we're going to have a one whole chapter about bonds okay one whole chapter about bonds which we'll talk about bonds much much more in details later on but I kept this example simple I used an annual rate so this way it's easy for you to understand but if you are using semi annual rate you have to adjust everything you have the interest payment is adjusted the number of period adjusted and the market rate is adjusted and usually it's the semi annual is the standard okay now again this topic don't worry this is covered much much more in depth in a different chapter at the end of this recording what I'm going to ask you to do is whether you are an accounting student or a CPA candidate to take a look at my material cp uh farhatlectures.com I don't replace your CPA review course keep it I am a useful addition I explain the material differently I can help you add 10 to 15 points to your CPA exam score which will help your pass put the exam behind you focus on your career and succeed in life don't shortchange yourself good luck study hard and of course stay safe