Accounting 205 - Chapter 10 - Reporting and Analyzing Long Term Liabilities

From the McGraw Hill Text

Bond

issuer’s written promise to pay the PAR VALUE of the bond WITH interest

Par Value (Bond)

AKA face value - paid at a stated future date *maturity date* - MOST bonds require semiannual payments (2x a year) of interest.

Maturity Date (Bond)

the Stated date of when the par value of a bond is to be paid

Bond Interest Formula

Par Value x Bond’s Contract Rate

Advantages of Bonds

1. Bonds do not affect owner control. It is not equity.

2. Interest on Bonds is Tax Deductible.

3. Can increase return on Equity.

Financial Leverage AKA Trading on the Equity

using someone else’s money to make more money than what you spent to borrow it. IE you pay less interest on your loan than the interest you made somewhere else.

Disadvantages of Bonds

1. Bonds can decrease ROE

2. Bonds require repayment of both interest and par value

Bond Issuances

State the number of bonds authorized, their par value, and the contract interest rate

Bond Indenture

the legal contract between the issuer and the bondholders

Bond Certificate

evidence of the company’s bond debt to the holder

Market Value (Bond)

Rate that borrowers are willing to pay and lenders are willing to accept for a bond AND its risk level. MV is shown as a % of Par (face) Value.

Par Bond

A bond issued at Par Value.

Contract Rate (Bond)

AKA coupon, stated, or nominal rate - The bond interest rate- usually computed on an annual rate and paid on a semiannual basis.

Relations between contract rate and market rate (bond)

Contract Rate = Market Rate … Par Value

Contract Rate < Market Rate … Discount Bond

Contract Rate > Market Rate … Premium Bond

Carrying (book) Value of Bond

Par value less discount value

Discount on Bonds Payable

A contra-liability account with a normal debit balance

Straight-Line Bond Amoritization

allocates equal bond interest expense to each interest period.

Premium Bonds

Bonds issues ABOVE par

Premium on Bonds

the amount by which the bond price exceeds par value

Bonds Payable

long-term liability reported on the balance sheet

Premium on Bonds Payable

an ADJUCT account (aka add-on) liability with a normal credit balance

Bond Retirement

AKA Bond Maturity

Carrying Value of Bond at Maturity

Always equals the Par Value

Call Option (Bond)

to retire bonds early by issuing callable bonds - gives the issuer an optiion to call the bonds before they mature by paying par value plus a call premium

Open Market Purchase

issuer repurchases bonds from the holders at Current Market Price

Difference Between Carrying Value and Amount Paid

recorded as a gain or a loss

Junk Bond

company bonds with low credit ratings due to higher likelihood of non-payment

Notes

issued in exchange for assets (such as cash). Notes are issued to a SINGLE lender (such as a bank)

Note Carrying (book) Value

Face Value - unamor discount OR + unam premium

Installment Note

a liability requiring a series of payments to the lender.

Secured Bonds (or Notes)

have specific assets of the issuer pledged (or mortgaged) as collateral. If the issuer doesn’t pay, the holder can demand a sale of the collateral so that proceeds are used to pay the obligation

Unsecured Bonds (or notes)

AKA debentures - backed by issuers general credit standing. These are riskier than secured debt.

term Bonds (and Notes)

Mature on a SPECIFIC date.

Serial Bonds (and Notes)

Mature at more than one date (often in a series) and are repaid over a number of periods.

Sinking Fund Bonds

require the issuer to set aside assets to pay debt in a sinking fund - these reduce the holders risk.

Registered Bonds

bonds issued in the names and addresses of their holders.

Bearer Bonds

bonds payable to whoever holds them

Coupon Bonds

this term reflects interest coupons that are attached to a bond. Coupons will mature, in which case the holder presents it to a bank or broker for collection.

Convertible Bonds (and Notes)

can be exchanged for a fixed number of shares of the issuing corp.’s stocker. This offers holders the potential to profit from increases in stock price. Holder still receives interest while held AND par value if they hold it to maturity.

Callable Bond

gives the issuer the option to retire a bond at a stated dollar amount before maturity.

Debt to Equity Ratio

= total liabilities / total equity