Long-term Liabilities - © Copyrright Doug Hillman 2000...

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Unformatted text preview: © Copyrright Doug Hillman 2000 Long-term Liabilities © Copyrright Doug Hillman 2000 Bonds ● Written promise to pay a specific sum of money on a speciific future date ● Purchaser is bondholder ● Receives Bond certificate © Copyrright Doug Hillman 2000 Classification of Bonds ● Registered - issued in name of holder ● Secured - assets pledged as security ● Debenture (unsecured) - based on general credit ● Serial - mature in installments ● Callable - corporation has option of retiring © Copyrright Doug Hillman 2000 Bonds Compared to Stock ● Bondholders are creditors ● Bonds a liability ● Interest is fixed charge ● Interest is expense ● Interest tax deductible ● No voting ● Stockholders are owners ● Stock is equity ● Dividends not fixed charges ● Dividends not expense ● Dividends not tax deductible ● Voting © Copyrright Doug Hillman 2000 Financial Leverage ● Borrowed money invested within business to earn a higher rate than borrowing cost ● When positive financial leverage occurs, use of bonds will produce higher EPS than financing same investment with stock ● Use of bonds will also produce higher amount available for reinvestment © Copyrright Doug Hillman 2000 Bond Terms ● Face value › The principal of the bond payable at maturity ● Stated interest rate › The rate multiplied by face value to get periodic cash interest payment ● Term › Time to maturity © Copyrright Doug Hillman 2000 Why Bonds Sell at Discount or Premium ● When market interest rate on comparable grade bonds is higher or lower than the stated rate, © Copyrright Doug Hillman 2000 Why Bonds Sell at Discount or Premium ● When market interest rate on comparable grade bonds is higher or lower than the stated rate, investors will adjust the purchase price of the bond so that they earn the desired market interest rate © Copyrright Doug Hillman 2000...
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This note was uploaded on 06/01/2010 for the course ACC 1000 taught by Professor Lee during the Spring '10 term at École Normale Supérieure.

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Long-term Liabilities - © Copyrright Doug Hillman 2000...

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