Chapter 13 - Long-term liabilities. This chapter presents the following content: Bonds, classification of bonds, bonds compared to stock, financial leverage, why bonds sell at discount or premium, sales price of bond, issuance of bonds,. | Long-term Liabilities Bonds Written promise to pay a specific sum of money on a speciific future date Purchaser is bondholder Receives Bond certificate Classification of Bonds Registered - issued in name of holder Secured - assets pledged as security Debenture (unsecured) - based on general credit Serial - mature in installments Callable - corporation has option of retiring Bonds Compared to Stock Bondholders are creditors Bonds a liability Interest is fixed charge Interest is expense Interest tax deductible No voting Stockholders are owners Stock is equity Dividends not fixed charges Dividends not expense Dividends not tax deductible Voting Financial Leverage Borrowed money invested within business to earn a higher rate than borrowing cost When positive financial leverage occurs, use of bonds will produce higher EPS than financing same investment with stock Use of bonds will also produce higher amount available for reinvestment Bond Terms Face value The principal of the bond payable | Long-term Liabilities Bonds Written promise to pay a specific sum of money on a speciific future date Purchaser is bondholder Receives Bond certificate Classification of Bonds Registered - issued in name of holder Secured - assets pledged as security Debenture (unsecured) - based on general credit Serial - mature in installments Callable - corporation has option of retiring Bonds Compared to Stock Bondholders are creditors Bonds a liability Interest is fixed charge Interest is expense Interest tax deductible No voting Stockholders are owners Stock is equity Dividends not fixed charges Dividends not expense Dividends not tax deductible Voting Financial Leverage Borrowed money invested within business to earn a higher rate than borrowing cost When positive financial leverage occurs, use of bonds will produce higher EPS than financing same investment with stock Use of bonds will also produce higher amount available for reinvestment Bond Terms Face value The principal of the bond payable at maturity Stated interest rate The rate multiplied by face value to get periodic cash interest payment Term Time to maturity Why Bonds Sell at Discount or Premium When market interest rate on comparable grade bonds is higher or lower than the stated rate, Why Bonds Sell at Discount or Premium When market interest rate on comparable grade bonds is higher or lower than the stated rate, investors will adjust the purchase price of the bond so that they earn the desired market interest rate Why Bonds Sell at Discount or Premium Why Bonds Sell at Discount or PremiumWhen market interest rate on comparable grade bonds is higher or lower than the stated rate, investors will adjust the purchase price of the bond so that they earn the desired market interest rate Issuing price determines effective or yield rate Why Bonds Sell at Discount or Premium If the market rate is higher than stated rate, investors will offer less than face value Difference between price paid and face value is .
