doing business and is fully tax deductible. Dividends paid to
stockholders are not tax deductible
Unpaid debt is a liability of the firm. If it is not paid, creditors can
legally claim assets of the firm.
Debt securities are called notes, debentures, or bonds.
Issues with an original maturity of 10 years or less are often
Longer than 10 years are called bonds.
Indenture (deed of trust) is the written agreement between the corporation
(the borrower) and its creditors.
A trustee is appointed by the corporation to represent the bondholder.
The trust company must:
Make sure the terms of the indenture are obeyed
Manage the sinking fund
Represent the bondholders in default, if the company defaults on
its payments to them.
Bond indenture is a legal document and generally includes the
The basic terms of the bonds
The total amount of bonds issued
A description of property used as security
The repayment arrangements
The call provisions
Details of the protective convenants
Face value (principal value) are usually in 1,000’s
Par value (initial accounting value) is almost always the same as face
Debenture is an unsecured bond, for which no specific pledge of
property is made.