[Anonymous]

Theoretically, the proceeds from the sale of a bond will be equal to:

In my mind the proceeds should be the present value of the principal (face) plus the present value of any purchased interest. In other words, it’s a 6 month coupon payment and three months have gone buy and so the buyer pays you for three months of interest that you aren’t going to get because they are.

But the right answer is this:

The present value of the principal amount due at the end of the life of the bond plus the present value of the interest payments made during the life of the bond, each discounted at the prevailing market rate of interest.

Wiley Explanation: Theoretically, market price (proceeds) of an obligation is equal to the present value of all future cash flows (i.e., the time value of money is considered). A bond has two sets of cash flows: periodic interest payments and the principal amount due at the end of the life of the bond. Such cash flows would be discounted at the prevailing market rate of interest at the time of the bond’s issuance.

Really – so the purchaser just hands over money equal to the present value of the principal and interest payments.

That makes no sense. Let’s forget the present value issue for the moment. That’s like the bank selling you a $10,000 1 year CD with a 10% interest rate for $10,100. If it sells it to you for that and then gives you your $10,100 back in a year then you’ve earned nothing.

I can see where you would sell a bond for the PV of the principal amount.

[Spartans92]

Present Value of the Principal Payment at Maturity + Present Value of Interest Payments made
= Market Value of Bond Proceeds

Have you taken FAR?

BEC- PASS

[Anonymous]

Proceeds from the sale to me refers to the monies generated from the sale of the bond. You don't get paid for interest income you haven't earned.

Perhaps this question is asking for proceeds in regards to the gross amount of the bond's principal plus whatever interest it generates.

[Excel14]

@CPA2021:

Not sure if I'm understanding your issue, but it seems like you might be referring to purchase between interest payment dates. Maybe I'm wrong. If you are, here is what happens….Lets say you are two months past the last semiannual interest payment when you purchase the bond. The reason you as the purchaser are required to pay the 2 months of interest along with the price of the bond, is because at the 6 month mark, you are going to get semiannual interest. The problem is, you only earned 4 months of interest, and not 6. So in essence, when you are paid the semiannual interest, you are merely getting a return of your 2 month payment to the seller, which winds up being a wash. Companies do it this way, because imagine the headache of having to decide which entities purchased bonds when, and trying to determine individual purchaser interest. Doing it this way, allows each purchaser to receive a 6 month payment, and makes things uniform.

BEC (2/28/16) ----- 78
FAR (09/10/16)-----
AUD
REG

CIA, CGAP, CFE

[Author]

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