Chapter 10 - Chapter 10: Reporting and Interpreting Bonds...

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Chapter 10: Reporting and Interpreting Bonds CHARACTERISTICS OF BONDS PAYABLE Reasons to issue bonds instead of stocks… Stockholders maintain control but bondholders do not Interest expense is tax deductible (reduced net cost of borrowing) Impact on earnings is positive Disadvantages of bonds (higher risk than equity)… Risk of bankruptcy Negative impact on cash flows Bond principal : amount a) payable at maturity of bond and b) on which periodic cash interest payments are computed; a.k.a par value , face amount, maturity value Stated rate : rate of cash interest per period stated in bond contract; selling price of bond does NOT affect periodic cash payment of interest Bond types… Debenture (unsecured) bond : no assets specifically pledged to guarantee repayment Secured bond Callable bond : may be called for early retirement at option of issuer Convertible bond : may be converted to other securities of issuer (usually common stock) Indenture
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Chapter 10 - Chapter 10: Reporting and Interpreting Bonds...

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