long term debt teaching

long term debt teaching - Chapter 14 Long-Term Financial...

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Chapter 14 Long-Term Financial Liabilities
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Issuing Long-Term Debt Obligations not payable within one year, or one business operating cycle—whichever is longer Examples include: Bonds payable Long-term notes Mortgages Pension liabilities Lease liabilities Often with restrictive covenants (terms) attached
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Bonds Most common type of long-term debt A bond indenture is a promise (by the lender to the borrower) to pay: a sum of money at the designated date, and periodic interest (usually paid semi-annually) at a stipulated rate on the face value A bond issue may be sold: either through an investment banker, or by private placement
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Notes Payable Similar in nature to bonds Require repayment of principal at a future date Require periodic interest payments The difference is that notes do not normally trade on public markets Accounting for bonds and notes is the same in many respects Like a bond, a note is recorded at the PV of future interest and principal, and any premium/discount is amortized over the life of the note
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Types of Long-Term Debt Bearer (coupon) bonds: are freely transferable by current owner Secured and unsecured debt: secured by collateral (real estate, stocks) Serial bonds: mature in instalments Callable bonds: give issuer right to call and retire debt prior to maturity Income and Revenue bonds: interest payments tied to some form of performance Deep-discount bonds: little or no interest payments; sold at substantial discount Convertible bonds: can be converted into other corporate securities for a specified time after issue
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Bond Ratings Companies such as DBRS, Moody’s Investors Service, Standard & Poor’s assess credit ratings of company bonds and preferred shares Bonds ratings range from a quality of “Prime” to “Very speculative” AAA rating indicates a rating of “Prime”, while a B rating indicates a “very speculative” rating
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Price of a bond issue is determined by finding the present value (PV) of future cash flows : the PV of the interest payment annuity (at the stated or coupon rate of interest), plus the PV of the redemption (face, par) value, both discounted at the market (yield) rate of interest in effect at issue date When market rate stated rate bond sells at discount When market rate < stated rate bond sells at premium Bond Valuation: Determining Bond Prices
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Face value of bond issue: $100,000 Term of issue: 5 years Stated interest rate: 9% per year, payable end of the year Market rate of interest: 11% Determine the issue price of the bonds. Bond Valuation: Bond Price
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This note was uploaded on 12/18/2011 for the course ACC acc621 taught by Professor Sydor during the Fall '10 term at Ryerson.

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long term debt teaching - Chapter 14 Long-Term Financial...

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