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Chapter_14_Notes[1][1] - C hapter 14 Notes L.J DeStefano...

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Chapter 14 Notes L.J. DeStefano Note payable and a Note Receivable are two sides of the same transaction - Two General Rules o 1. Periodic Interest is the effective rate times the amount of the debt outstanding during the period o 2. Long term liabilities are reported at their present values. The present value of a liability is the present value of its related cash flows (principle and or/ interest payments), discounted at the effective rate of interest at issuance Part A- Bonds - A bond issue, breaks down a large debt into manageable parts, usually 1,000 or 5,000 units - Avoids the necessity of finding a single leader, who is both willing and able to loan a large amount at a reasonable interest rate - Theoretically can have 400,000 lenders for 400,000- 1,000 - Bonds- obligate the issuing corporation to repay a stated amount (variously referred to as the principle, par value, face amount or maturity value) at a specified maturity date o Maturities for bonds typically range from 10-40 years The Bond Indenture Bond indenture - specific promises made to bondholders o Usually held by a trustee, commercial bank - Debenture Bond - most corporate bonds, secured only by the “full faith and credit” of the issuing corporation. No specific assets are pledged as security o In bankruptcy, debenture holders and other general creditors are treated equally - Subordinate Debenture- not entitled to receive any liquation payments, until the claims of other specified debt issues are satisfied - Mortgage Bond- backed by a lien of specific real estate owned by the issuer o Considered less risky than a debenture, typically commands a lower interest rate - Registered bonds - most corporate bonds* o Interest is mailed directly to the owner, owner is registered with issuing company - Coupon bonds- name of the owner of a coupon bond was not registered o To collect interest, owner clipped a coupon and followed rules on indenture - Callable- allowed by most corporate bonds o Allows issuing company to buy back, or call, outstanding bonds from bondholders before their scheduled maturity date
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o Allows the company protection against being stuck with relatively high cost debt in the events interest rate fall during period before maturity - “No Call”- provisions usually prohibit calls during the first few years of a bonds life. The corporation may require to redeem the bonds on a prespecified, year by year basis. Bonds requiring such sinking fund redemptions often are labeled sinking fund debentures - Serial Bonds - retired in installments during all or part of the life of the issue o Each bond has its own maturity date, so a 30 year serial issue bond might have 25-30 separate maturity dates Recording Bonds at Issuance - Bonds represent a liability to the corporation that issues the bonds and an asset to a company that buys the bonds as an investment Determining the Selling Price - Other things being equal, the lower the perceived riskiness of the corporation issuing bonds, higher the price those bonds will command -
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