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Unformatted text preview: Chapter 20 Long-term debt 20.1 Long-term debt: A review • Long-term debt securities - promises by the issuing firm to pay interest and principal on unpaid balance • maturity refers to length of time debt remains outstanding with some unpaid balance • short-term ( unfunded ): less than 1 year • long-term ( funded ): more than 1 year 20.2 The public issue of bonds • (1) offering must be approved by board of directors ; • (2) registration statement prepared for review by securities and exchange commission (SEC) • (3) if accepted, registration statement becomes effective 20 days later, and securities are sold • indenture- written agreement between corporation (borrower) and trust company ( deed of trust ) • trust company must (1) be sure terms of indenture are obeyed; (2) manage the sinking fund; (3) represent bondholders in case of default • indenture includes - basic terms of bonds, description of property used as security, details of protective covenants, sinking-fund arrangements, call provision Basic terms • usually face value of $1,000 ( principal value, denomination ) • par value (initial accounting value) almost always same as face value • interest accrues continually over the year quoted prices of bond usually include accrued interest • market value is determined by market transactions and interest rate movements • some bonds are in bearer form - ownership is not recorded in company books Security • debt securities are classified according to the collateral (assets that are pledged as security for payment of debt) protecting the bondholder • mortgage securities - secured by mortgage on real estate or other long-term assets of borrower mortgage-trust indenture - can be closed- or open-end • mortgages can be on specific property, or blanket mortgages...
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This note was uploaded on 11/16/2009 for the course F 3033 taught by Professor Hh during the Spring '09 term at Maastricht.
- Spring '09