Chapter10 -powerpoint- class(1)

Chapter10 -powerpoint- class(1) - CHAPTER 10 Reporting and...

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Reporting and Analyzing Long-Term Liabilities C H A P T E R 10
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Chapter 10 Topics 1. Bonds Issue and Retirement -Par -Discount -Premium 2. Amortization of Discount/Premium 3. Retirement at and before Maturity 4. Issue of Bonds between Interest dates 5. Accrual of Bond Interest Expense 6.Long Term Notes Payable (Conceptual only) NOTE: Computation of Issue Price of Bond using present value tables will not be covered. Important: Please see changes to end of chapter Exercises and Problems On WebCt under Chapter 10
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WHAT IS A BOND ?? A “Bond” is another word for a loan. An issuer of a Bond (borrower) agrees to pay an amount identified as the Par Value (Face Value/Principal) to the bond holder on the maturity date of the bond. Most Bonds also make periodic (typically semi-annual) interest payments at a predetermined contract (stated) rate.
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Bonds do not affect Bonds do not affect stockholder control. stockholder control. Interest on bonds is Interest on bonds is tax deductible. tax deductible. Bonds can increase Bonds can increase return on equity. return on equity. Advantages of Bonds
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Bonds require payment of both Bonds require payment of both periodic interest and par value at periodic interest and par value at maturity. maturity. Bonds can decrease return on Bonds can decrease return on equity when the company pays equity when the company pays more in interest than it earns on more in interest than it earns on the borrowed funds. the borrowed funds. Disadvantages of Bonds
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Secured and Secured and Unsecured Unsecured Term and Term and Serial Serial Registered Registered and Bearer and Bearer Convertible Convertible and Callable and Callable Types of Bonds
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. . .an investment firm called an underwriter. The underwriter sells the bonds to. . . A trustee monitors the bond issue. A company sells the bonds to. . . . . . investors Bond Issuing Procedures
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Bond Certificate at Par Value Bond Selling Price Corporation Investors Basics of Bonds
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Bond Issue Date Bond Interest Payments Bond Interest Payments Corporation Investors Interest Payment = Bond Par Value × Stated Interest Rate Basics of Bonds
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Bond Issue Date Bond Maturity Date Bond Par Value at Maturity Date Corporation Investors Basics of Bonds
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Example of a Bond Issue From The Wall Street Journal, March 29, 2007: Service Corp. International - $400 million of debt was priced through lead managers Bank of America Securities and Merrill Lynch. Maturity: April 1, 2015 Coupon: 6.75% Price: 99.583 Yield: 6.819% Ratings: B1 (Moody’s Investor Service), BB-Minus (Standard & Poor’s Ratings Group ) Bonds typically issued in denominations of $1000 Bond trading at 95 sells for 95% of par value or $950. Bond trading at 102.5 sells for 102.5% of par value or $1025 Bond market values are expressed as a percent of their par value. Bond market values are expressed as a percent of their par value.
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Price at which a Bond Sells Determined by the relationship between the Contract rate of Interest and the Market Rate of Interest Contract Rate = Market Rate Contract Rate < Market Rate Contract Rate > Market Rate Note: Contract rate is also referred to as stated rate or coupon rate.
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Bond Contract Interest Rate 10% Market Rate Bond Sold at Par Value , Premium or Discount ?
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