Sandhill Corporation reported net income of $550,000 in 2020 and had 900,000 common shares outstanding throughout the year. On May 1, 2020, Sandhill issued 5% convertible bonds. Each $1,000 bond is convertible into 120 common shares. Total proceeds at par amounted to $1,000,000, and was allocated to the liability and equity components under the residual value method. The liability component was measured first, at present value of the stream of interest payments plus present value of the bond maturity value, all discounted at 8% (the interest rate that applies to similar straight bonds). At the time of issuance, the liability component was recorded at $924,000. Sandhill’s tax rate is 30%.
The discount price is the interest charge the central bank imposes financial banks that need to rent extra resources.
It is an authorized percentage price set by the Fed, not an
exchange price; hence, much of its significance begins from the
sign the Fed is transferring to the commercial stores
As a conclusion, short-term business percentage charges
manage to support their progress. If the Fed wants to provide banks
more resources, it can decrease the percentage rate it charges,
through attractive banks to obtain more.
Alternatively, it can cover up assets by increasing their price and
convincing the banks to decrease borrowing.
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