Unformatted text preview: Bonds Payable and Investments in Bonds
Chapter 13 1 Financing Corporations How can corporations finance their growth (i.e., acquisitions, develop new products, expansion, etc.)? Internal method use of past profits External methods: Equity Financing Chapter 11 Debt Financing Chapter 13 2 Bond An interest-bearing note that requires periodic interest payments with the face amount being repaid at the maturity date. Represents a liability of the corporation. Bondholders are creditors of the issuing corporation, and their claims on the assets of the corporation rank ahead of stockholders.
3 Pricing of Financial Assets The price of any financial asset (i.e., stock or bond) is the net present value of all future cash flows discounted at an appropriate interest rate. 4 Pricing of Bonds Payable The price that the buyers are willing to pay for the bonds depends on: The face value (FV) of the bond (i.e., the amount due at the maturity date). The periodic interest to be paid on the bond (depends on the FV, coupon interest rate, time period) The market rate of interest (i.e., the rate of return that the market expects on the bond)
5 Often the coupon rate of interest differs from the market rate of interest. If this occurs, the bonds will not sell at FV. They will sell at a premium or a discount. If CR < MR, bonds will sell at a discount If CR= MR, bonds will sell at FV (i.e., Par) If CR > MR, bonds will sell at a premium.
6 By adjusting the price of the bond, the buyer will earn the market rate of interest. Any premium or discount will be amortized into interest expense over the life of the bond: Straight-Line Method Effective-Interest Method (GAAP)
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- Spring '99