Chapter 14 Notes

Chapter 14 Notes - Chapter 14: Long-Term L iabilities...

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Chapter 14: Long-Term Liabilities Section 1: Bonds Payable - Long-Term Debt - consists of probable future sacrifices of economic benefits arising from present obligations that are not payable within a year or the operating cycle of a company - Examples: bonds payable, long-term notes payable, mortgages payable, pension liabilities, and lease liabilities - A corporation, per its bylaws, usually requires approval by the board of directors and the stockholders before bonds or notes can be issued o Same for all types of long-term debts arrangements - Generally, long-term debts have various covenants or restrictions that protect both lenders and borrowers o Often include amounts authorized to be issued, interest rate, due date(s), call provisions, property pledged as security, sinking fund requirements, working capital and dividend restrictions, and limitations concerning the assumption of additional debt - Many bondholders suffer considerable losses when companies add more debt to the capital structure Issuing Bonds - A bond arises from a contract known as a bond indenture - A bond represents a promise to pay: o A sum of money at a designated maturity date o Periodic interest at a specified rate on the maturity amount (face value)
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- Individual bonds are evidenced by a paper certificate and typically have a $1,000 face value - Companies usually make bond interest payments semiannually - Main purpose of bonds is to borrow for the long term when the amount of capital needed is too large for one lender to supply - A company may sell an entire bond unit to an investment bank which acts as a selling agent in the process of marketing the bonds Types and Ratings of Bonds - Secured Bonds - backed by a pledge of some sort of collateral o Bonds not backed by collateral are unsecured - Debenture bond is unsecured - Junk Bond - unsecured and very risky, often pays a higher interest rate o Often use these bonds to finance leverage buyouts - Term Bonds - bond issues that mature on a single date - Serial Bonds - issues that mature in installments o Often used by school or sanitary districts, municipalities, or other local tax bodies - Callable Bonds - give the issuer the right to call and retire the bonds prior to maturity - Convertible Bonds - convertible into other securities of the corporation for a specified time after issuance - Two types of bonds have been developed to attract capital in a tight money market: commodity-backed bonds and deep-discount bonds Page 2 of 17
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- Commodity-Backed Bonds (asset-linked bonds) - redeemable in measures of a commodity, such as barrels of oil, tons of coal, or ounces of rare metal - Deep-Discount Bonds (zero-interest debenture bonds) - sold at a discount that provides the buyer’s total interest payoff at maturity - Registered Bonds - bonds issued in the name of the owner and require surrender of the certificate and issuance of a new certificate to complete a sale - Bearer (coupon) Bond - not recorded in the name of the owner and may be
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Chapter 14 Notes - Chapter 14: Long-Term L iabilities...

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