Chapter%2014%20Questions[1] - Emir Ibrahimovic ACC311-01...

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Emir Ibrahimovic ACC311-01 Chapter 14 Questions 14-2 As a general rule, how should long-term liabilities be reported on the debtor’s balance sheet? Long term liabilities should always be reported under the long term liabilities section in the balance sheet. Then they should also be disclosed in the notes. 14-3 How are bonds and notes the same? How do they differ? A company can borrow cash from a bank or other financial institution by signing a promissory note. This is when a company receives cash and they are required to pay back each month a portion for interest and a portion toward the principal. This is typically also called an installment loan. This can be used for many things such as a mortgage. While on the other hand a bond issue divides large liabilities into many smaller liabilities. In a bond a company is obligated to repay a stated amount at a specified maturity date and periodic interest between the issue date and maturity. So the similarity is that they both can be used to finance something that the company may need, but the difference is how this is paid back. The principal can be all paid in the very end using a bond, or it can be paid over the periods using a note. 14-4 What information is contained in a bond indenture? What purpose does it serve? The specific promises made to bondholders are described in a document called a bond indenture. The bond indenture is held by a trustee, such as a commercial bank. 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. The information contained in the bond indenture has everything that would determine if the bank would have to bring legal action, such as the effective interest rate, the coupon rate, maturity date, and any other promises that may have been made within the terms. 14-6 How is the price determined for a bond (or bond issue)? Supply and demand cause a bond to be priced to yield the market rate of interest for securities of similar risk and maturity. Although the price can be calculated by using the present value of all the cash flows required, this includes the principal and the interest. The discount rate would become the market rate, and it would also be divided by the number of periods that interest is required to be paid per year. 14-7 A zero-coupon bond pays no interest. Explain A zero coupon bond pays no interest but instead it offers a return in the form of a “deep discount” from the face amount. For example a company that want to borrow a bond with a maturity of $25 million. Assuming the interest rate is 12% and there are 10 periods, the present value of this type of maturity would be about $8 million, but no interest payments are required. On the other hand a regular bond would require interest payments, so the present value of a $25
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This note was uploaded on 02/22/2012 for the course ACC 311 taught by Professor Crampton during the Winter '11 term at Jacksonville College.

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Chapter%2014%20Questions[1] - Emir Ibrahimovic ACC311-01...

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