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.
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.
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.
: investment bank guaranteeing certain sum to co, taking risk of selling bonds for w/e they can
Best efforts underwriting:
bank sells bond for commission on proceeds
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
backed by collateral EX: mortgage and real estate
secured by stockand bonds of other cos
not backed by collateral EX: debenture bond, junk bond (very risky, high rate)
mature on single date
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
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.