How will the $2 billion bond issuance by the University of Michigan impact its balance sheet?

The University of Michigan issued $2 billion in bonds in March 2022. The proceeds from these bonds will be used to finance construction and renovation projects on the campus.

$1.2 billion was issued as century bonds, which must be repaid in 100 years. This century bond issuance is the largest century issuance in the higher education sector to date. The century bond has a coupon rate of 4.45 percent.

The other $800 million of the bond issuance were 30-year bonds, with a coupon rate of 3.5 percent.

$300 million of the 30-year bonds were green bonds. The proceeds from green bonds can only be used to fund green capital projects that support environmental or climate-related objectives. Among other green projects, the University of Michigan plans to build a geothermal heating and cooling system for one of the buildings on campus.

The bonds were issued at par.

The University of Michigan has a fiscal year end of June 30.

See the following tutorial video on issuing bonds at par and then answer the questions following the video. (You can also access the video at this link.)

Questions

  1. What were the cash proceeds from the century bond issuance? (Ignore any underwriting fees or other charges.)
  2. What will be the amount of the cash interest paid semi-annually on the century bonds?
  3. What were the cash proceeds from the 30-year bond issuance? (Ignore any underwriting fees or other charges.)
  4. What will be the amount of the cash interest paid semi-annually on the 30-year bonds?
  5. What does the term “at par” mean?
  6. Assume that the university issued the bonds on March 1, 2022. How much interest expense should the university accrue on June 30, 2022 for the century bonds? For the 30-year bonds?
  7. How does the issuance of these bonds impact the university’s balance sheet on the date of issuance?

About Dr. Wendy Tietz, CPA, CMA, CSCA, CGMA

Dr. Wendy Tietz is a professor of accounting at Kent State University in Kent, Ohio, USA. She is also a textbook author with Pearson Education.

2 Responses to “How will the $2 billion bond issuance by the University of Michigan impact its balance sheet?”

  1. Thanks, Wendy! I am introducing bonds tomorrow, so this was perfect timing!

Leave a Reply to Dr. Wendy Tietz, CPA, CMA, CSCA, CGMA Cancel reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: