ACC151Chapt10 - Chapter 10 Long Term Liabilities ADVANTAGES...

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Chapter 10: Long Term Liabilities ADVANTAGES OF BONDS What is a bond? Long-term liability, company borrows money from bond holders to fund projects, then over the maturity of the bond the corporation pays interest to the bond holders, and give principal back. Normal debt pays interest and principal so debt slowly goes down v. bond only pays interest until the very end less risky to own debt than equity because of the order of liquidation Bonds do not affect stockholder control Interest on bonds is tax deductible (dividends on investments) Bonds can increase return on equity DISADVANTAGES OF BONDS Bonds require payment of both periodic interest and par value at maturity Bonds can decrease return on equity when the company pays more in interest than it earns on the borrowed funds Earning more with principal than I’m paying in interest: Int rate= 10%, Return= 15% Return on Equity Increases BASICS OF BONDS Par Value : principal the company is borrowing Maturity
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