Ch 10(4).doc - Chapter 10 Reporting and Interpreting Bonds 1 Corporations use bonds to raise long-term capital Bonds offer a number of advantages

Ch 10(4).doc - Chapter 10 Reporting and Interpreting Bonds...

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1 Chapter 10: Reporting and Interpreting Bonds 1. Corporations use bonds to raise long-term capital. Bonds offer a number of advantages compared to stock, including the ability to earn a higher return for stockholders, the tax deductibility of interest, and the fact that control of the company is not diluted. Bonds do carry additional risk, however, because interest and principal payments are not discretionary. 2. The bond contract is called a bond indenture . This specifies the legal provisions of the bonds. 3. Three types of events must be recorded over the life of a typical bond: (1) the receipt of cash when the bond is first sold, (2) the periodic payment of cash interest, and (3) the repayment of principal at the maturity of the bond. Bonds are reported at the present value of the future cash flows specified in the bond contract. Bonds sell at their par (face) value when the stated (contract or coupon) interest rate on the bonds is the same as the market (yield or effective interest) rate required by investors. To record bonds issued at par, cash is
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  • Spring '14
  • Chapter 10

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