Chapter 10 - Chapter 10 Chapter 10 Reporting and...

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Unformatted text preview: Chapter 10 Chapter 10 Reporting and Interpreting Reporting and Interpreting Bonds Bonds Advantages Advantages of Bonds of Bonds Stockholders maintain control because bonds Stockholders maintain control because bonds are debt, are debt, not not equity. equity. Interest expense is Interest expense is tax deductible tax deductible . . The impact on earnings is positive because The impact on earnings is positive because money can often be borrowed at a low money can often be borrowed at a low interest rate and invested at a higher interest interest rate and invested at a higher interest rate. rate. Disadvantages Disadvantages of Bonds of Bonds Risk of bankruptcy exists because the interest and debt must be paid back as scheduled or creditors will force legal action . Negative impact on cash flows exists because interest and principal must be repaid in the future. Characteristics of Bonds Payable $ Bond Issue Price $ Bond Certificate At Bond Issuance Date Bonds payable are long-term debt for the issuing company. Company Issuing Bonds Investor Buying Bonds Characteristics of Bonds Payable Periodic Interest Payments $ $ Principal Payment at End of Bond Term $ $ Company Issuing Bonds Investor Buying Bonds Fun Definitions Fun Definitions Debenture bonds Not secured with the pledge of a specific asset. Callable bonds May be retired and repaid (called) at any time at the option of the issuer. Convertible bonds May be exchanged for other securities of the issuer (usually shares of common stock) at the option of the bondholder. Bond Transactions Bond Transactions When a company issues bonds, it When a company issues bonds, it specifies specifies two cash flows two cash flows related to the related to the transaction: transaction: Principal Principal Interest Interest Reporting Bond Transactions The issue price of the bond is determined by the market, based on the time value of money. The interest rate used to compute the present value is the market interest rate ....
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This note was uploaded on 12/16/2009 for the course AEM 2500 taught by Professor Poe,g. during the Fall '07 term at Cornell University (Engineering School).

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Chapter 10 - Chapter 10 Chapter 10 Reporting and...

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