Ch14_Notes - Ch.14 Long-Term Liabilities Long-term debt(LTD...

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Ch.14 – Long-Term Liabilities Long-term debt (LTD) – consists of probable future sacrifices of economic benefits arising from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer. Examples include Bonds payable LT Notes payable Mortgages payables Pension liabilities Lease liabilities LTD has covenants attached to them (often called debt covenants) which restrict the amount of other debt the company can carry or allows the lender to increase interest rates if the company’s financial position worsens. LBO example Issuing Bonds A bond (contract is a bond indenture) represents a promise to pay: 1. a sum of money at a designated maturity date, plus 2. periodic interest at a specified rate on the maturity amount Types of Bonds Secured bonds – backed by a pledge of collateral Unsecured bonds – not backed by collateral Term bonds – mature on a single date Serial bonds – mature in installments Callable bonds – gives right to issuer to call & retire bonds prior to maturity Convertible bonds – convertible into other securities Commodity-backed bonds – redeemable in measures of a commodity (see example in book) Deep-discount bonds (zero-interest bonds) – sold at discount and provides the buyer’s total interest payoff at maturity Registered bonds – issued in name of owner – sale requires surrender of certificate and issuance of new certificate in new owner’s name Bearer (coupon) bonds – not registered and may be transferred by delivery Income bonds – pay no interest unless issuing company is profitable Revenue bonds – interest is paid from specified revenue sources It is important to remember that bonds represent debt to the issuer, but they are an investment to the buyer (see insert on p.674). Chapter 14 Notes 1
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Valuation of B/P – Discount (Dsct) & Premium (Prem) A bond has a face value – usually $1000 – but the sales price depends on several factors, including the supply and demand of buyers and sellers, relative risk, market conditions, and the state of the economy Investors value a bond at the PV of its expected future cash flows , which are interest and principal.
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