Lake Pushkar

Lyons Document Storage Corporation:

Bond Accounting

By
S.Vijay Ganesh (WPM 15 VIJ)
Malikaa (WPM15MAL)
Sriram Ramakrishnan ( WPM 15 SRI)
Mahesh Gurumoorthy( WPM 15 MAH)

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.
Analysis: 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

$ 1000

Coupon Rate
Year
Maturity

8%
Liability at
the Beginning
of Period

Interest at
4.5%
(semi
annually)

Liability at
the end of
Period before
Payment

Payment

Liability
20 Years
at the end
9%
of Period
$ 80

02-07-2006 (Dec06)

$92,31,829

$4,15,432

$96,47,261

$4,00,000

PVIF(
9%, 20 Years)
02-07-2007

$92,47,26
$ 730.24
1

$92,63,388

$4,16,852

$96,80,240

$4,00,000

$92,80,24
0$ 908.24

Required rate
Coupon Payment
PVIFA(9%, 20 Years)
Bond
Price
(Dec07)

Total Bond Amount Collected (10,000 Bonds)

$ 178

$ 9.1 Million

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

Par Value
Coupon Rate
Maturity
Required rate
Coupon Payment

$ 1000
8%
20 Years
6%
$ 80

PVIFA(6%, 10.5 Years)

$ 609.88

PVIF( 6%, 10.5 Years)

$ 542.50

Bond Price
Total Bond Amount Collected (10,000 Bonds)

$ 1152.40
$ 11.52 Million

6%.

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

$ 1000
6%
10 Years
6%
$ 60

PVIFA(6%, 10.5 Years)

$ 442

PVIF( 6%, 10.5 Years)

$ 558.

Bond Price
Total Bond Amount Collected (10,000 Bonds)

$ 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

T.Current
Liabilities

$12,995

$12,995

$12,995

$12,704

Long Term
Debt

$10,000

$9,356

$9,316

$9,247

Total Liabilities

$22,995

$22,351

$22,311

$21,951

$2,838

$2,838

$2,838

$2,838

$75,837

$75,837

$75,837

$75,837

Remarks
Assume: No Change in
Current Liabilities
Due to New Bond
No Significant Change in in
Liabilities

Share holder
Equity
Common
Shares
Additional Paid
In Capital

Retained
Earning

$1,49,755

$1,51,279

$1,51,279

$1,46,530

Assume :a) No Change in

Retained Earning
b) 1523.8 (in Thousand paid
to Old Bond Investors)

Total
Shareholders
Equity

$2,28,430

$2,29,954

$2,29,954

$2,25,205

No Significant Change in
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

Coupon

Year

No of

Payment

Payment

Present Value of Payment

Present Value

annually)

Annually)

Settlement

(semi

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

(Dis.rate 3% semi

$3,88,350
$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

of Final

02-07-2019

21
Sum

$31,22,544
$84,00,000

$61,66,010

Present value of an Annuity & Single Lump Sum

$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

Year

Payment

Coupon

Payment

Present Value of

Present Value

3% semi Annually)

Settlement

Payment (Dis.rate

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

of Final

$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).I 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

10% Change in Liabilities from
Previous Year

Total Liabilities

$24,519

$22,351

$22,311

$21,951

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

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.

Share holder 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

Present Value of

Present Value

3% semi Annually)

Settlement

Payment (Dis.rate

Payment

Coupon Payment

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
$69,24,000

$51,50,582

Sum

of Final

$64,43,876

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).I would not
Suggest going for Issuing New Bond.