ACTG 2011 Lecture Notes - Lecture 4: Effective Interest Rate, Interest Expense, Pension
Document Summary
Payment of both interest and principal are usually mad periodically (i. e. once a month, once a year, etc. ) on loans. A loan that is secured by real estate is commonly known as a mortgage. Consider: you borrowed k loan, 6% interest, repayable annually 10 years. Journal entry when acquiring the loan: dr. cash, cr. Journal entry after a year: dr. interest expense, cr. Issued by a company to lenders/investors: multiple lenders, not one, generally, have a longer term, principal is repaid at the end of term, not during, bonds are traded on exchanges, like stocks. Company may receive more or less than face value. Lecture 4: amount of interest required by lender given the risk and current market rates, may be than the coupon rate. Price equals pv of total cash flow to buyer. Discount rate is equal to market rate. Cash flow is interest and principal: pv of interest stream + pv of principal, proceeds on issuance of bond.
