1
Long-Term Liabilities
Chapter 9
Long-term liabilities
• Bonds payable
• Notes payable
• Leases
• Pensions
• Deferred taxes
• Other
Bonds Payable
• Characteristics
–
Control
–
Interest is tax deductible
–
Leverage effect
–
Default risk
–
Secured and Unsecured
–
Bond Indenture (Terms: Serial, Callable,
Convertible)
–
Bond covenants (Restrictions on
dividends, accounting ratios, etc)

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2
Bonds Payable
• Terminology
–
Bond Principal (par value, face amount,
maturity value)
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Coupon rate (Stated rate, nominal rate)
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Bond price: 100 - sells at par, less than 100 –
Bond price: 100
sells at par, less than 100
sells at a discount, greater than 100 – sells at
a premium
–
Market interest rate (yield-to-maturity)
–
Market rate at the date of issuance is the
effective-interest rate (accounting rate)
Pricing Bonds
You have the choice of investing in one of two
bonds. Both bonds are sold in $1,000 face
value lots. Both bonds mature in 12 months
and the market rate of interest is 10%.
The first bond has a coupon rate of 0%, while
the second bond has a coupon rate of 100%.
Which bond is the preferred investment?
Pricing Bonds
The price of the bonds is the present value of the bond
cash flows discounted at the market rate of interest
(required rate of return or yield).
The bond cash flows are the face value to be received
at maturity and the interest payments (face value x
coupon rate)
coupon rate).
If coupon rate equals the market rate then the bond
sells at par (price =100).
If the coupon rate is less than the market rate then the
bond sells at a discount (price less than 100).
If the coupon rate is more than the market rate then the
bond sells at a premium (price greater than 100).