ACCT 240 004 11 15 Notes Chapter 10 Reporting and Interpreting Bonds Bonds Securities that are issued to borrow large sums of money Characteristics of bonds payable Advantages Stockholders maintain control because bonds are debt not equity Interest expense is tax deductible Impact on earnings is positive because money can be borrowed at a low interest rate and invested at a higher interest rate Disadvantage of bonds Risk of bankruptcy exists because the interest and debt must be paid back as scheduled or creditors will force legal action Negative impact on cash flows exist because interest and principal must be repaid in the future Two types of cash payment in the bond contract 1 Principal 2 Cash interest payments Bond Terms 1 Principle par value and face value Original value paid 2 Contract stated or coupon rate of interest 3 Market yield or effective interest rate An indenture is a bond contract that specifies the legal provisions of a bond issue Debenture bonds No assets are pledged as guarantee of repayment at maturity Secured bonds Specific assets are pledged as guarantee of repayment at maturity Callable bonds Bond may be called for early retirement by the issuer Convertible bonds Bond may be converted to other securities usually common stock Characteristics of bonds payable The bond indenture contains covenants designed to protect the creditors The bond issuer also prepares a prospectus which describes the company the bonds and how the proceeds of the bonds will be used The trustee makes sure the issuer fulfills all of the provisions of the bond indenture E10 4 b Present value 6651 x 100k 66 510 Value of interest 100 000 x 8 8000 year 5 5824 x 8000 44659 2 She will issue the bond at 111 169 c Present value 5132 x 100k 51 320 Value of interest 100 000 x 8 8000 8000 x 4 8684 38947 2 She will issue the bond at 90 267 2 a Present Value 5835 x 100k 58 350 Value of interest 100 000 x 8 8000 8000 x 5 2064 41651 2 She will issue the bond at 100 001 2 If bond is issued at par you still go through process
View Full Document
Unlocking...