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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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. 14-8 Bob Anderson, 2004 Two Interest Amounts What is the interest rate called that is written in the terms of the bond indenture (agreement)? (Stated, Coupon, or Nominal rate)
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This note was uploaded on 08/06/2008 for the course ECON 136B taught by Professor Anderson during the Spring '08 term at UCSB.

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

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