ACC311ch14 - Accounting 311 Chapter 14 Bonds Payable...

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Accounting 311 Chapter 14 Bonds Payable Objective 1: Describe formal procedures assoc w/ issuing LT debt. Long Term Debt: consists of probably future sacrifices of econ. benefits arising from pres. Obligations not payable w/I a year or oper cycle whichever is longer. LT liabs: bonds pay, LT notes pay, mortgages pay, pension liabs, lease liabs. A corp requires approval from BOD and SHs to issue bonds and notes and other LT debt arrang. Covenants and restrictions : protect lenders and borrowers. Indenture/agreement has amts authorized to be issued, int rate, due date, call provisions, property pledges for security, sinking fund reqs, working cap, divid restrictions, limitations of assumption of addtnl debt. Should be stated in notes or fin. stmts. LBO (Leverage Buyout): results in loss cuz additional debt increases default. Issuing Bonds Bond Indenture: contract from which bond arises from. Bond is promise to pay 1) sum of $ at designated maturity date + 2)periodic int at spec. rate on maturity amt/face val. Bonds have typically $1,000 face val and make pymts semiann. Firm underwriting : investment bank guaranteeing certain sum to co, taking risk of selling bonds for w/e they can get. Best efforts underwriting: bank sells bond for commission on proceeds Private Placement: co sells bonds to large institution w/o aid of unwrite Types and Ratings of Bonds Ratings: AAA to CCC, Below BBB are junk bonds Secured: backed by collateral EX: mortgage and real estate Collateral Trust: secured by stockand bonds of other cos Unsecured bonds: not backed by collateral EX: debenture bond, junk bond (very risky, high rate) Term: mature on single date Serial: mature in installments EX: school, sanitary district, municipalities, local taxing bodies Callable: give issuer right to call and retire prior to mature Convertible: convertible to other securities of co for spec. time after issuance Commodity Backed: AKA asset linked bonds; redeemable in measures of commodity such as barrels of oil, tons of coal, oz of rare metal. Acctng prob is projecting maturity val. EX: 1,000 or 50oz of silver Deep discnt: AKA zero interest debenture bonds. Are sold at discnt that provides buyers total int payoff at maturity. JCPenny was 1 st to market these bonds. Registered bonds: issed in name of owner, req surrender of certificate and issuance of new one to complete sale. Bearer/Coupon bond: not recorded in name of owner, may be transferred from one owner to another merely by delivery Income bonds: pay no interest unless issuing co is profitable Revenue bonds: so called cuz interest is paid from specified rev sources. Freq used by airports, schools, counties, toll rds, governmental bodies Investors looks at corporate bond listings (w/ yield) Valuation of bonds payable Issuing co must obtain SEC approval of bond issue, under go audits, and issue prospectus-document which describes feature of bond and related info, have bonds printed, Selling price: set by supply and demand of buyers and sellers. Risk, market condtns, and econ.
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This note was uploaded on 03/31/2008 for the course ACC 311 taught by Professor Griffin during the Fall '07 term at N.C. State.

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ACC311ch14 - Accounting 311 Chapter 14 Bonds Payable...

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