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Ch14-lectureNotes-07

Ch14-lectureNotes-07 - Chapter14:LongTermLiabilities...

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Chapter 14: Long Term Liabilities Chapter 14: Long Term Liabilities
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   Long-term debt  consists of probable  future sacrifices.    It has various  covenants  or  restrictions   for the protection of both lenders and  borrowers.    The  indenture agreement  incorporates  the terms of the issue and restrictions.   Long Term Debt: General Long Term Debt: General
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Bonds are the most common type of long- term debt. They are usually issued in denominations  of $1,000. bond indenture  is a promise (by the  lender to the borrower) to pay: 1. a sum of money at the designated date, and 2. periodic interest at a stipulated rate on the  face value. Issuing Bonds Issuing Bonds
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Secured  and  unsecured bonds Term  or  serial bonds Callable bonds Convertible bonds Selected Types of Bonds Selected Types of Bonds
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Issuer of Bonds Bondholders lend cash 1. Bond Certificate 2. Payment Periodic Interest 3. Payment of Face Value (maturity) Bond Issues: Parties to the  Bond Issues: Parties to the  Contract Contract
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The price of a bond issue is  determined by: the  present value of the interest payments and the  present value of the face value , both discounted at the  market (effective)  rate of interest  at date of issue. Interest payments by borrower are  calculated as: Face value of bond issue  x  Stated (face)  rate of interest Valuation of Bonds: Determining  Valuation of Bonds: Determining  Bond Prices Bond Prices
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Given: Face value of bond issue:     $100,000 Term of issue:     5 years Stated interest rate:     9% per year,  payable annually end of the year Market rate of interest: 11%   What is the issue price of the bonds? Determining Bond Prices:  Determining Bond Prices:  Example Example
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Year 1 Year 2 Year 3 Year 4 Year 5 $9,000  $9,000  $9,000  $9,000  $9,000  Interest $100,000 face value Redemption at maturity ==> Interest = $100,000 x  9% per year stated rate Determining Bond Prices:  Determining Bond Prices:  Example: Cash Flows Example: Cash Flows
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Year 1 Year 2 Year 3 Year 4 Year 5 $9,000  $9,000  $9,000  $9,000  $9,000  Interest Discount at  market rate , 11% $9,000 x  3.69590 $  33,263 $100,000 Discount at  market rate , 11% $100,000 x  0.59345 $ 59,345 plus
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