Lecture 24 Long-term Debt

Lecture 24 Long-term Debt - Long-Term Debt ● Understand...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Long-Term Debt ● Understand the terminology of long-term debt including par value, stated versus effective interest rate (or yield), discounts, and premiums. ● Understand how long-term debt affects the financial statements over time. Why do We Care About Long-Term Debt Long-term debts are frequently used to finance assets. They are economically important. The amount and nature of long-term debt provides important information about the financial health and stability of a company. Increasing financial leverage (i.e., increase the use of debt to finance assets) increases firms' risk of financial distress. Long-Term Debt ● Bonds ● Mortgage ● Capital leases Terminology for Bonds ● The issuer of the bond receives the cash proceeds (the price of the bond) upfront; in return, the issuer makes periodic coupon payments and principal payment at maturity. ● Maturity ■ Last payment date ● Par value / face value / principal ■ Amount due at maturity ● Coupon rate ■ Coupon rate t * the principal = the coupon payment. ● Market value ■ The price of the bond at any point of time. It changes with the market interest rate. ■ At issuance, bonds are recorded at the initial market value, which is the present value of future coupon and principal payments. ● Market rate of interest ■ The rate of interest demanded by the market given the risk of the bond ■ Used to convert future payments to current ■ Can be higher or lower than the coupon rate Accounting for Long -Term Debt Two basic principles: (1) Net Book value (BV) of Long-term debts, such as bonds, equals the present value (PV) of the future cash outflows the company is committed to making....
View Full Document

This note was uploaded on 04/11/2009 for the course ACCT 410x taught by Professor Bonner during the Fall '06 term at USC.

Page1 / 19

Lecture 24 Long-term Debt - Long-Term Debt ● Understand...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online