Chapter 14 - Bonds and Long-Term Notes
Periodic interest is calculated as the
effective interest rate times the amount of the debt
outstanding during the period
This same principle applies to the flip side of the transaction, i.e., the
creditor’s receivable or investment.
The approach also is the same regardless of the specific form of
the debt – that is, whether in the form of notes, bonds, leases, pensions, or other debt instruments.
Long-term liabilities are appropriately reported at their
The present value of a
liability is the present value of its related cash flows – specifically the present value of the face
amount of the debt instrument, if any, plus the present value of stated interest payments, if any.
should be discounted to present value at the effective (market) rate of interest at issuance.
Bonds and notes are very similar.
obligate the issuing corporation to repay a
stated amount (e.g., the
) at a specified
In return for the use of the money borrowed, the company also agrees to pay
lender between the issue date and maturity.
The periodic interest is a stated percentage of face
In concept, bonds and notes are accounted for in precisely the same way.
Normally a company will borrow cash from a bank or other financial institution by signing a
Corporations, especially medium- and large- sized firms, often choose to borrow
cash by issuing bonds and instead of borrowing from a lending institution, it borrows from the
A bond issue, in effect, breaks down a large debt into manageable parts ($1,000 units) which
makes it more attractive to individual and corporate investors.
Also, bonds typically have longer
maturities than notes.
The most common form of corporate debt is bonds.
All of the specific promises made to bondholders are described in a bond indenture.
agreement will specify the bond issue’s face amount, the stated interest rate, the method of paying
interest (whether the bonds are registered bonds or coupon bonds), whether the bonds are backed by
a lien on specified assets, and whether they are subordinated to other debt.
The bond indenture also
might provide for redemption through a call feature, by serial payments, through sinking fund
provisions, or by conversion.
It also will specify the trustee (usually a commercial bank or other
financial institution) appointed by the issuing firm to represent the rights of the bondholders.
bond indenture serves as a contract between the company and the bondholder(s).
If the company
fails to live up to the terms of the bond indenture, the trustee may bring legal action against the
company on behalf of the bondholders.