Chapter 10 Reporting and Interpreting Bonds_Notes

Chapter 10 Reporting and Interpreting Bonds_Notes - Chapter...

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Chapter 10 – Reporting and Interpreting Bonds Capital structure – mixture of debt and equity a company uses to finance its operations Issue bonds to raise debt capital Bonds are securities issued when borrow large amounts of money Characteristics of Bonds Payable Advantages of issue bonds instead of stock o Stockholders maintain control – bondholders do not vote or share in company’s earnings o Interest expense is tax deductible – reduced net cost of borrowing o Positive impact on earnings Disadvantages of issuing bonds o Riskier: risk of bankruptcy – interest payments must be paid whether the corporation earns an income or incurs a loss o Negative impact on cash lows Bond principle – amount a) payable at the maturity of the bond and b) on which the periodic cash interest payments are computed Par value/face value – another name for bond principle… Stated rate – rate of cash interest per period stated in the bond contract o Periodic interest payment is principal times stated interest rate o Selling price of bond not affect periodic cash payment of interest Debenture – an unsecured bond; no asset are specifically pledged to guarantee repayment Callable bonds – bonds that may be called for early retirement at the option of the issuer Secured bond –specific assets are pledged as a guarantee of repayment at maturity Convertible bond – may be converted to other securities of issuer (generally common stock) Indenture – a bond contract that specifies the legal provision of a bond issue Bond certificate – bond document that each bondholder receives Trustee – independent party appointed to represent the bondholders
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This note was uploaded on 02/20/2009 for the course AEM 221 taught by Professor Little,j. during the Fall '08 term at Cornell University (Engineering School).

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Chapter 10 Reporting and Interpreting Bonds_Notes - Chapter...

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