chapter10notes

chapter10notes - LONG-TERM DEBT I. BONDS A. Long-Term debt...

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LONG-TERM DEBT I. BONDS A. Long-Term debt sold to creditors . A bond makes (2) promises: 1. Repayment of principal at maturity (face value of bond) 2. Periodic interest payments (semi-annual) B. Terminology 1. Coupon Rate - fixed rate of interest paid on face value of bond (also known as contractual or stated interest rate) 2. Market Rate - going rate of interest that borrowers & lenders are willing to accept (effective rate or yield or discount rate) 3. Term Bond - all bonds mature on same date 4. Serial Bond - bonds retire in installments 5. Debenture Bonds - unsecured 6. Callable Bonds - corporation reserves right to buy them back early at a stated price 7. Convertible Bonds - can be exchanged for a stated # shares of stock 8. Simple Interest - interest on Principle only 9. Compound Interest - interest on Princ + Interest earned that has been reinvested.
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C. Advantages/Disadvantages of Issuing Bonds Advantages Disadvantages 1. 1. 2. D. Determining the Market Value of a Bond Example: Denver Co. issues 10%. 3-yr Bond; FV = $100,000; Interest paid semiannually 12% market
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SELLING PRICE OF BONDS IS AFFECTED BY: 1. Difference between coupon 2. Timing of Cash Flows - Time Value of Money Selling Price of bond is dependent on Time Value of Money. Because a bond is made up of (2) promises of future cash flows, you must find the present value of BOTH to determine selling price. Selling Price = PV of Face Amt. + PV of Int. Pmts
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chapter10notes - LONG-TERM DEBT I. BONDS A. Long-Term debt...

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