Ch. 14 - Bonds and Long-Term Notes

Ch. 14 - Bonds and Long-Term Notes - Chapter 14 Bonds and...

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Chapter 14 – Bonds and Long-Term Notes A note payable and a note receivable are two sides of the same coin. Bonds A bond issue divides a large liability into many smaller liabilities Bonds obligate the issuing corporation to repay a stated amount ( principle , par value , maturity value ) at a specified maturity date and periodic interest between the issue date and maturity o Periodic interest = effective interest rate x debt outstanding The Bond Indenture A bond indenture describes the specific promises made to bondholders Debenture bonds – secured only by the “full faith and credit” of the issuing corporation o No specific assets are pledged as security o Subordinated debenture – not entitled to receive any liquidation payments until the claims of other specified debt issues are satisfied Mortgage bond – backed by a specific asset owned by the issuer o less risky than debentures, lower interest rate Coupon bond Callable bond – issuing company can buy back outstanding bonds from holders before their scheduled maturity date Sinking fund – retire a bond gradually over its term to maturity Recording Bonds at Issuance Determining the Selling Price o The price of a bond issue at any particular time is not necessarily equal to its face value. Premium – sell for higher face amount with lower interest rate Discount – sell for lower face amount with higher interest rate o Other things being equal, the lower the perceived riskiness of the corporation issuing binds, the higher the price these bonds will command o A bond issue will be priced by the marketplace to yield the market rate of interest for securities of similar risk and maturity The price is calculated as present value of all the cash flows required of the bonds , where the discount rate used in the present value calculation is the market rate Determining Interest – Effective Interest Method The effective interest on debt is the market rate of interest multiplied by the outstanding balance of the debt Interest is calculated on the outstanding debt balance at the effective rate.
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Ch. 14 - Bonds and Long-Term Notes - Chapter 14 Bonds and...

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