Lyons Document Storage Corporation:

Bond Accounting

1) A) Lyons Document Storages Controller, eric Petro told the Rene that bonds were
issued in 1999 at a discount and that only approximately $ 9.1 Million was received in
Case. Explain what is meant by the term premium or Discount as they relate to
bonds.
Solution: Lyons Document Storage Issued the bond for $ 10 Million with the Par Value of
$ 1000, Coupon Rate of 8% in 1999, during that Period Investors was demanding 9%.
Hence Investors were bid only for $ 908.24. Bond was sold at $ 908.24 against the par
value of $ 1000. Hence it is known as discount Bond. When the Price of the Bond is
higher than the Par Value, Then Bond is known as Premium Bond. Premium Bond or
Discount Bond Occurs only when there is difference arises between Coupon Rate &
Market Interest Rate (expected Rate). Regardless of the Market Interest Rate, Bond
Price will reach the Par value of the Bond when it reaches the Maturity Period.

b) Compute exactly how much the company received from its 8% bonds if the rate
prevailing at the time of Original Issue was 9% as indicated in Exhibit 2.

Par Value
Coupon Rate
Maturity
Required rate
Coupon Payment

$ 1000
8%
20 Years
9%
$ 80

PVIFA(9%, 20 Years)
PVIF( 9%, 20 Years)
Bond Price
Total Bond Amount Collected (10,000 Bonds)

Liability at

Interest at

$ 730.24
$ 178
$ 908.24
$ 9.1 Million

Liability at
the end of

Liability

Year
02-07-2006 (Dec06)
02-07-2007
(Dec07)

the Beginning
of Period
$92,31,829

4.5% (semi
annually)
$4,15,432

Period before
Payment
$96,47,261

Payment
$4,00,000

at the end
of Period
$92,47,261

$92,63,388

$4,16,852

$96,80,240

$4,00,000

$92,80,240

C) The recomputed amount in the balance sheet in December, 2006 and December, 2007
are $ 92, 47,261 and $ 92, 80,240.

D) Current market Value of the bonds outstanding at the current effective Interest rate
of 6%.
Par Value
Coupon Rate
Maturity
Required rate
Coupon Payment
PVIFA(6%, 10.5 Years)
PVIF( 6%, 10.5 Years)
Bond Price
Total Bond Amount Collected (10,000 Bonds)

$ 1000
8%
20 Years
6%
$ 80
$ 609.88
$ 542.50
$ 1152.40
$ 11.52 Million

2) If you were Rene Cook, Would you recommend issuing $ 10 Million, 6% Bonds on Jan
2, 2009 and using the Proceeds and Other Cash to Refund the existing $ 10 Million, 8%
Bonds? Will it cost more in terms of Principal and Interest Payments, to keep the
existing bonds or to Issue New Ones at a Lower Rate? Be prepared to discuss the Impact
of a Bond Refunding on the Following Areas like Cash Flow , Current Year Earnings,
Future Year Earnings.
New Bond Issuing:

Par Value
Coupon Rate
Maturity
Required rate
Coupon Payment
PVIFA(6%, 10.5 Years)
PVIF( 6%, 10.5 Years)
Bond Price
Total Bond Amount Collected (10,000 Bonds)

$ 1000
6%
10 Years
6%
$ 60
$ 442
$ 558.
$ 1000.00
$ 10 Million

By Issuing New Bond, Company can collect $ 10 Million. To Repay Old bond, Company
has to pay $ 11.52 Million. Difference amount of $ 1.52 need to be paid from Retained
Earnings. This is additional Expense for the Company.
Balance Sheet ( Liabilities & Share Holder Equity Position) ( Issuing
New Bond for $ 10 Million)
Units in
000
Particulars

2009

2008

2007

2006 Remarks

T.Current
Liabilities

$12,995

$12,995

$12,995

Long Term
Debt

$10,000

$9,356

$9,316

Total Liabilities

$22,995

$22,351

$22,311

$2,838

$2,838

$2,838

$2,838

$75,837

$75,837

$75,837

$75,837

Assume: No Change in
$12,704 Current Liabilities
$9,247 Due to New Bond
No Significant Change in in
$21,951 Liabilities

Share holder
Equity
Common
Shares
Additional Paid
In Capital
Retained
Earning
Total
Shareholders
Equity

$1,49,755

$1,51,279

$1,51,279

Assume :a) No Change in

Retained Earning
b) 1523.8 (in Thousand paid
$1,46,530 to Old Bond Investors)

$2,28,430

$2,29,954

$2,29,954

No Significant Change in
$2,25,205 Shareholders Equity

Total Liabilities
& Shareholders
Equity

$2,51,425

$2,52,305

$2,52,265

$2,47,156

Retained Earnings will be Reduced by $ 6,00,000 in 2010 due to Coupon( Interest) Payment. If
the Company Retain the Earning (assume $ 1,49,755,000). Then Final Retained Earnings will be
$ 1, 49,155,000 after deducting the Interest Payment.

If Company Stick to Ongoing Bond (Cash Flow will be as below). Present value of
annuity & Lump Sum amount is calculated below

Year

No of
Payment

Coupon
Payment
(semi
annually)

02-07-2009

$4,00,000

02-01-2010

$4,00,000

02-07-2010

$4,00,000

02-01-2011

$4,00,000

02-07-2011

$4,00,000

02-01-2012

$4,00,000

02-07-2012

$4,00,000

02-01-2013

$4,00,000

02-07-2013

$4,00,000

02-01-2014

10

$4,00,000

02-07-2014

11

$4,00,000

02-01-2015

12

$4,00,000

02-07-2015

13

$4,00,000

02-01-2016

14

$4,00,000

02-07-2016

15

$4,00,000

02-01-2017

16

$4,00,000

02-07-2017

17

$4,00,000

02-01-2018

18

$4,00,000

02-07-2018

19

$4,00,000

02-01-2019

20

$4,00,000

02-07-2019

21

$4,00,000

02-07-2019

21
Sum

Present Value of Payment

(Dis.rate 3% semi
Annually)
$3,88,350

Present Value
of Final
Settlement

$3,77,038
$3,66,057
$3,55,395
$3,45,044
$3,34,994
$3,25,237
$3,15,764
$3,06,567
$2,97,638
$2,88,969
$2,80,552
$2,72,381
$2,64,447
$2,56,745
$2,49,267
$2,42,007
$2,34,958
$2,28,114
$2,21,470
$2,15,020
$31,22,544

$84,00,000

Present value of an Annuity & Single Lump Sum

$61,66,010

$92,88,553

If Company Plan to go with issuing New Bond for $ 10 Million , Coupon rate 6%,
Market Expected rate is 6% (Cash Flow will be as below). Present value of annuity &
Lump Sum amount is calculated below

No of
Payment

Year

Coupon
Payment

Present Value of
Payment (Dis.rate
3% semi Annually)

02-07-2009

$3,00,000

$2,91,262

02-01-2010

$3,00,000

$2,82,779

02-07-2010

$3,00,000

$2,74,542

02-01-2011

$3,00,000

$2,66,546

02-07-2011

$3,00,000

$2,58,783

02-01-2012

$3,00,000

$2,51,245

02-07-2012

$3,00,000

$2,43,927

02-01-2013

$3,00,000

$2,36,823

02-07-2013

$3,00,000

$2,29,925

02-01-2014

10

$3,00,000

$2,23,228

02-07-2014

11

$3,00,000

$2,16,726

02-01-2015

12

$3,00,000

$2,10,414

02-07-2015

13

$3,00,000

$2,04,285

02-01-2016

14

$3,00,000

$1,98,335

02-07-2016

15

$3,00,000

$1,92,559

02-01-2017

16

$3,00,000

$1,86,950

02-07-2017

17

$3,00,000

$1,81,505

02-01-2018

18

$3,00,000

$1,76,218

02-07-2018

19

$3,00,000

$1,71,086

02-01-2019

20

$3,00,000

$1,66,103

02-01-2019

20
$57,00,000

$41,71,980

Sum

Present Value
of Final
Settlement

$55,83,948

Present value of an Annuity & Single Lump Sum

$97,55,928

Expense from Issuing New Bond will be $ 22,07,546

Market Price of Old Bond

$1,15,23,800

Liability at the end of 2008

$93,16,254

Difference
-$22,07,546
Difference need to be Paid from Companys Reserve ( Loss for Company).

Saving from Issuing New Bond will be -$4,67,375

Present value of annuity & single Lump sum ( Old Bond)

$92,88,553

Present value of annuity & single Lump sum ( New Bond of 10Million)

$97,55,928

Difference

-$4,67,375

Net Saving from Issuing New Bond will be - $26,74,921 ( - $ 0.267 Million).
There is not significant saving (only Loss due to the new bond). We would not

Suggest going for Issuing New Bond.

3) Assume 65 bonds could be issued and the Proceeds used to refund the existing
bonds. Compare the effects of these transactions with those calculated in Q2. If you are
Rene Cook, What amount of New Bonds would you recommend and why?
Balance Sheet ( Liabilities & Share Holder Equity Position) ( New Bond Issue $ 11.54 Million)
Particulars

2009

2008

2007

2006

Remarks

T.Current Liabilities

$12,995

$12,995

$12,995

$12,704

Assume: No Change in Current

Liabilities

Long Term Debt

$11,524

$9,356

$9,316

$9,247

Due to New Bond

Total Liabilities

$24,519

$22,351

$22,311

$21,951

10% Change in Liabilities from

Previous Year

Common Shares

$2,838

$2,838

$2,838

$2,838

Additional Paid In
Capital

$75,837

$75,837

$75,837

$75,837

Retained Earning

$1,51,279

$1,51,279

$1,51,279

$1,46,530

Assume :a) No Change in Retained

Earning

Share holder Equity

Total Shareholders
Equity

$2,29,954

$2,29,954

$2,29,954

$2,25,205

No Significant Change in
Shareholders Equity

Total Liabilities &

Shareholders Equity

$2,54,473

$2,52,305

$2,52,265

$2,47,156

No Significant Change in Total

Liabilities & Shareholders Equity.

Retained Earnings will be Reduced by $ 6,92,000 in 2010 due to Coupon( Interest) Payment. If
the Company Retain the Earning (assume $ 1,51,279,000). Then Final Retained Earnings will be
$ 1, 50,587,000 after deducting the Interest Payment.

If Company Plan to go with issuing New Bond for $ 11.54 Million , Coupon rate 6%,
Market Expected rate is 6% (Cash Flow will be as below). Present value of annuity &
Lump Sum amount is calculated below

Year

No of
Payment

Coupon Payment

Present Value of
Payment (Dis.rate
3% semi Annually)

02-07-2009

$3,46,200

$3,36,117

02-01-2010

$3,46,200

$3,26,327

02-07-2010

$3,46,200

$3,16,822

02-01-2011

$3,46,200

$3,07,594

02-07-2011

$3,46,200

$2,98,635

02-01-2012

$3,46,200

$2,89,937

02-07-2012

$3,46,200

$2,81,492

02-01-2013

$3,46,200

$2,73,293

02-07-2013

$3,46,200

$2,65,333

02-01-2014

10

$3,46,200

$2,57,605

02-07-2014

11

$3,46,200

$2,50,102

02-01-2015

12

$3,46,200

$2,42,818

02-07-2015

13

$3,46,200

$2,35,745

02-01-2016

14

$3,46,200

$2,28,879

02-07-2016

15

$3,46,200

$2,22,213

02-01-2017

16

$3,46,200

$2,15,740

02-07-2017

17

$3,46,200

$2,09,457

02-01-2018

18

$3,46,200

$2,03,356

02-07-2018

19

$3,46,200

$1,97,433

02-01-2019

20

$3,46,200

$1,91,683

02-01-2019

20

Sum

Present Value
of Final
Settlement

$64,43,876
$69,24,000

$51,50,582

Present value of an Annuity & Single Lump Sum

$1,15,94,458

All amount to the Old Investors will be Paid through Issuing New Bond for
the same Value ( $ 11.54 Million) . Expense from Issuing New Bond will be $ 0.
Saving from Issuing New Bond will be -$ 23,05,905
Present value of annuity & single Lump sum ( Old Bond)

$92,88,553

Present value of annuity & single Lump sum ( New Bond of 10Million)

$1,15,94,458

Difference

-$ 23,05,905

Net Saving from Issuing New Bond will be - $23,05,905 ( - $ 0.23 Million).
There is not significant saving (only Minor Loss due to the new bond). We would not

suggest going for Issuing New Bond