Chapter 11 Handout 2

Chapter 11 Handout 2 - Accounting for Bonds HO #11 Ch. 11...

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Accounting for Bonds HO #11 Ch. 11 Bonds – A form of note issued by corporations, governments, etc., to bondholders to raise cash. Bonds are a written promise to pay a principal amount plus interest payments at specified intervals. Bond Ratings – The issuing company will pay bond rating companies (e.g. Moodys, AAA, AA, A Least Risky BBB, BB, B More Risky CCC, CC, C Very Risky DDD, DD, D In Default The higher the rating, the lower the interest rate paid. Advantages of issuing bonds instead of issuing capital stock: 1. Interest expense reduces income taxes. 2. Does not reduce percentage ownership of current stockholders. Disadvantages of issuing bonds instead of capital stock: 1. More debt increases possibility of bankruptcy. 2. Bondholders may put restrictions on the company in the form of bond covenants. Bond Terminology: Par Value – The par value of the bond is stated in denominations of $1,000. Par value is also called: 1. Face value 2. Maturity Value 3. Bond Principal Stated Interest Rate – The annual interest rate paid to bondholders on par value. The stated rate is also called:
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Chapter 11 Handout 2 - Accounting for Bonds HO #11 Ch. 11...

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