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136b_chapter14 - LONG TERM LIABILITIES Chapter 14 Long-Term...

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07:49 14-1 Bob Anderson, UCSB 2004 LONG TERM LIABILITIES Chapter 14 14-2 Bob Anderson, 2004 Long-Term Liabilities WHAT IS A LONG-TERM LIABILITY? Present obligation, payable by sacrIfice of economic benefit in the future Settled >12 months (or operating cycle, whichever is longer) IMPORTANT LIKELY CHARACTERISTICS Interest Covenants or restrictions Notes payable and Bonds payable : Why issue bonds? 14-3 Bob Anderson, 2004 Contract representing a promise to pay: (1) a sum of money at a designated maturity date, plus (2) periodic interest at a specified rate. Generally a fixed rate (Stated, nominal, or coupon rate) Generally pay interest semi-annually Bond Indenture 14-4 Bob Anderson, 2004 Types of Bonds Debenture bond No collateral security Secured bonds Backed by pledge of collateral (Mortgage) Term bonds Maturity in lump-sum Serial bonds? Matures in installments
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07:49 14-5 Bob Anderson, 2004 Types of Bonds Callable bonds Issuer has right to retire bonds before maturity at a specified price. Registered bonds Record maintained of debt holders Bearer bonds Unregistered holder clips coupons to receive interest 14-6 Bob Anderson, 2004 Types of Bonds Convertible bonds Convertible to common stock at option of the investor Deep discount bonds Sold at a discount that provides the buyer’s total interest payoff at maturity. Revenue bonds Interest paid from specified revenue sources Income bonds Pays no interest unless the issuing company is profitable. 14-7 Bob Anderson, 2004 BONDS- FAIR VALUE CONCEPT The value the purchaser gets is what they pay, based on the interest rate in effect on the date the bond is purchased. This is why there are premiums and discounts: If today’s rate is 2.5% and I can go buy a bond that pays me 12%, would I pay the same for a bond that pays me 12% as I would for one that pays me 2%? NO I would not, I would be willing to pay a “premium” for the 12% bond. If I buy a bond today that pays interest at 5% and the market rate subsequently declines to 2%, would the fair value of the bond be impacted? YES, I could sell it for more than I paid for it, I would be able to sell it for a premium.
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