Chapter 20 - Long-term debt

Chapter 20 - Long-term debt - Chapter 20 Long-term debt...

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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 (pledges many assets owned by
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