Week 11 – Capitalize vs. Expense

2 Concepts
Week 11 – Land vs. Building

2 Concepts
Week 11 – Sale of Fixed Assets

3 Concepts
Week 11 – Goodwill

1 Concept
Week 12 – Notes Payable

3 Concepts
A **bond** is a promise made by a borrower to pay back a lender the **face value** of the bond at **maturity**, plus periodical **interest payments**.

...whereas a note is paid off *in its entirety* at maturity.

**Annuities** are the **periodical payments** that the **borrower must pay** to the lender.

These are the same amount each time!

**Scenario**: You takes out a 5-year bond from your local bank for $1,000 at a 5% stated annual interest rate.

**Annuity** = $1,000 x 5%**Annuity** = $50

These $50 annuity payments are paid each of the 5 years of the bond!

The stated interest rate is written into the bond contract, whereas:

The **effective interest rate** is used to determine the **true allotment** of the annuity payments towards **interest** vs. **bond liability**. It's set by the market.

Compared to the stated interest rate, the effective interest rate can either be:

- Higher (discount)
- Lower (premium)
- Same (par)

This determines how the bond *selling price* compares to its *face amount*.

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