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Bond Amortization, Retirement and Value of a Bond

Bond Amortization

 A bond amortization is a financial certificate that has been reduced in value for recording on financial
statements. It is one where the discount amount being amortized becomes part of its interest
expense over the life of the bond.

 For example, North Valley Regional High School, in response to much-needed improvements, issued a
15-year amortized bond to help fund operating costs and capital improvements. The bond is projected to
cost $323,000 and should reduce the taxpayers burden of the general fund being used to make these
needed improvements to the school.

Retirement

 Technically, “retirement of bonds” is an accounting term that you’ll see used on financial statements. It
refers to a buyback of bonds previously sold.

 In other words, it means a bond issuer has paid off the debt represented by the bonds.
 For example, on a company’s cash statement, retirement of bonds may be used to explain a reduction in
the firm’s long-term debt.

Value of a Bond
 A bond is issued with a stated value, known as the par, or face value.
 A bond is a debt instrument that provides a periodic stream of interest payments to investors while
repaying the principal sum on a specified maturity date. A bond’s terms and conditions are contained in
a legal contract between the buyer and the seller, known as the indenture.

Key Bond Characteristics

Each bond can be characterized by several factors. These include:

 Face Value
 Coupon Rate
 Coupon
 Maturity
 Call Provisions
 Put Provisions
 Sinking Fund Provisions

a) Face Value

The face value (also known as the par value) of a bond is the price at which the bond is sold to investors when
first issued; it is also the price at which the bond is redeemed at maturity. In the U.S., the face value is usually
$1,000 or a multiple of $1,000.

the bond holders are being promised a coupon payment of (0. for example. With a consol. since existing bonds can then be replaced with lower yielding bonds.000) = $50 per year. Since a sinking fund reduces credit risk to bond holders. the bond will offer a higher yield than an otherwise identical bond with no call provision. This provision enables issuers to reduce their interest costs if rates fall after a bond is issued. A bond containing such a provision is said to be putable. d) Maturity A bond’s maturity is the length of time until the principal is scheduled to be repaid. since it can’t be bought or sold separately from the bond. In the U. this equals the coupon rate times the face value of the bond. A sinking fund reduces the possibility of default.S. default occurs when a bond issuer is unable to make promised payments in a timely manner. This price is known as the call price.. if a bond issuer promises to pay an annual coupon rate of 5% to bond holders and the face value of the bond is $1. . but the principal is never repaid. this percentage is known as the coupon rate. g) Sinking Fund Provisions Some bonds are issued with a provision that requires the issuer to repurchase a fixed percentage of the outstanding bonds each year. a bond’s maturity usually does not exceed 30 years.05)($1. For example. A bond containing a call provision is said to be callable. There have also been a few instances of bonds with an infinite maturity. these bonds can be offered with a lower yield than an otherwise identical bond with no sinking fund. Since a call provision is disadvantageous to the bond holder. Since a put provision is advantageous to the bond holder. the Walt Disney Company issued a 100-year bond in 1993. This provision enables bond holders to benefit from rising interest rates since the bond can be sold and the proceeds reinvested at a higher yield than the original bond. these bonds are known as consols. Occasionally a bond is issued with a much longer maturity. f) Put Provisions Some bonds contain a provision that enables the buyer to sell the bond back to the issuer at a pre-specified price prior to maturity. interest is paid forever.000. regardless of the level of interest rates. c) Coupon A bond’s coupon is the dollar value of the periodic interest payment promised to bondholders.b) Coupon Rate The periodic interest payments promised to bond holders are computed as a fixed percentage of the bond’s face value. This price is known as the put price. the bond will offer a lower yield than an otherwise identical bond with no put provision. A call provision is known as an embedded option. e) Call Provisions Many bonds contain a provision that enables the issuer to buy the bond back from the bondholder at a pre- specified price prior to maturity.