Doing business and is fully tax deductible dividends

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doing business and is fully tax deductible. Dividends paid to stockholders are not tax deductible o Unpaid debt is a liability of the firm. If it is not paid, creditors can legally claim assets of the firm. Long-term Debt Debt securities are called notes, debentures, or bonds. o Issues with an original maturity of 10 years or less are often called notes 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: o Make sure the terms of the indenture are obeyed o Manage the sinking fund o Represent the bondholders in default, if the company defaults on its payments to them. Bond indenture is a legal document and generally includes the following provisions: o The basic terms of the bonds o The total amount of bonds issued o A description of property used as security o The repayment arrangements o The call provisions o 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 value. Debenture is an unsecured bond, for which no specific pledge of property is made.
Sinking fund is an account managed by the bond trustee for the purpose of repaying the bonds. Call provision allows the company to repurchase or “call” part or all of the bond issue at stated prices over a specific period; usually corporate bonds are callable. o Most have a deferred call provision where you cannot call in the beginning of the bond. Call premium is the difference between the call price and the stated value Bond ratings are concerned only with the possibility of default Some different types of bonds Government bonds o U.S. Treasury bonds Exempt from state income taxes o Municipal notes and bonds Almost always callable, exempt from federal taxes Tax bracket Yielding 8%, risk and maturity 6%, investor in 40% tax bracket .08 x (1-t*)=.06 ; t*=.25, thus an investor in a 25% tax bracket would make 6 percent after taxes from bond. Zero Coupon Bond o Deducts interest every year. o Some can be zero coupon bonds for only part of their lives Floating Rate Bonds o Coupons payments are not fixed and can be adjusted o Majority of floaters have the following features: The holder has the right to redeem note at par on the coupon payment date after some specified amount of time; this is called a put provision. The coupon rate has a floor and ceiling, meaning that the coupon is subject to a minimum and a maximum; coupon rate is said to be “capped” and the upper and lower rates are sometimes called the collar. o Inflation-linked bond; issued sometimes called TIPS Income bonds U.S treasury market does bond trading similar to stock trading.

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