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Introduction to Corporate Bonds. Legal Document. Publicly Traded . Raise Capital. Let’s look at some terms. Underwriters. Bond Indenture. Serial vs. Term. Secure vs. Unsecure. Face, Par, Principal. Contract vs. Market Rate of Interest. Callable vs. Convertible. Bond Terms. Wow
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Introduction to Corporate Bonds Legal Document Publicly Traded Raise Capital
Let’s look at some terms. Underwriters Bond Indenture Serial vs. Term Secure vs. Unsecure Face, Par, Principal Contract vs. Market Rate of Interest Callable vs. Convertible
Bond Terms Wow Let’s get started
Underwriters Corporate staff may not have the time or expertise, so they Outsource the work to underwriters, Investment banks and brokerage firms: • Manage all aspects of the bond issuance • Charge a fee
Bond is a formal legal document has a variety of features needs proper wording, fine print and disclosures Bond Indenture
Serial vs. Term Serial Bonds A portion of the principal matures at regular intervals Have a plan for paying the principal Term Bonds All of the principal matures at once
Secure vs. Unsecure Secure Backed by corporate assets Creditors – Pay attention! Unsecure Backed by the general credit of the corporation Debenture Bonds
Face, Par, Principal • Interchangeable Terms • Refer to the amount that must be repaid at maturity Due at maturity
Interest Rates • Contract Rate • Stated on the bond • Determines cash due on • interest payment dates Stated Rate Remains constant • Market Rate • Market driven • Determines • Issue price • Interest expense Effective Rate Fluctuates
Callable vs. Convertible Callable Corporation can pay off debt early Corporation decides Convertible Bondholders can swap bonds for shares of corporate stock Bondholder decides
ABC Corporation Minimum Information Issue Date Maturity Date Contract Interest Rate Principal Interest Payment Dates
ABC Corporation 1/1/20X1 20 years Issue Date Maturity Contract Interest Rate 8% $500,000 Principal Interest Dates: 6/30 and 12/31 Interest Payment Dates
Interest Computation Interest due every 6 months • 6/30 and 12/31 $500,000 X .08 X 6/12 = $20,000 $500,000 X .04 = $20,000
Journal Entries 1/1/X1 – ABC Corp issues $500,000, 20 year, 8% bonds at par (100%)
Journal Entries 6/30/X1 – ABC Corp pays interest
Journal Entries 12/31/XX21 – ABC Corp pays the principal
Balance Sheet Presentation ABC Corporation Balance Sheet 12/31/X1 Long-term Liabilities Bonds Payable $500,000
Advanced Topics Bond Discounts Bond Premiums Bond Retirements and Conversions Adjusting Entries Bond Issue Price