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Long-term Liabilities: BONDS see “Confederation Bridge…”p. 734 of text

Long-term Liabilities: BONDS see “Confederation Bridge…”p. 734 of text. Text pages734 757 (no amortization) DO: P.766+ Questions; BE16-1,2,3; E16-1,2; P16-4A. No ASSET as Collateral. What are bonds? p.736.

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Long-term Liabilities: BONDS see “Confederation Bridge…”p. 734 of text

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  1. Long-term Liabilities: BONDSsee “Confederation Bridge…”p. 734 of text Text pages734757 (no amortization) DO: P.766+ Questions; BE16-1,2,3; E16-1,2; P16-4A Chapt. 16 LT Debt

  2. No ASSET as Collateral What are bonds? p.736 • Bonds are a form of interest-bearing notes issued by corporations, governments, and governmental agencies. • Bonds, like common shares, can be sold in small denominations (usually a thousand dollars), and as a result they attract investors. • Often secured against assets; if unsecured  debentures • priority claim on assets is case of bankruptcy Chapt. 16 LT Debt

  3. EQUITY selling (issuing) more shares of a company Loss of control / dilution of ownership of the company Lower potential EPS DEBT Borrow large sums of money required to finance (pay for) big projects Long-term capital to match the future revenues generated from the acquisition Financing the Growth of a Company Chapt. 16 LT Debt

  4. BONDS: Pros & Cons p.737 • Maintain ownership • Interest is tax deductible (p. 737 ill.16-2) • Lower ROI to creditors than equity • Interest Payments = “servicing the debt” • Redeem = principal paid back at maturity Chapt. 16 LT Debt

  5. 2000 2001 2002 2003 2000 2001 2002 2003 TYPES OF BONDSp.738 • Bonds that mature at a single specified future date are called term bonds. • In contrast, bonds that mature in installments are called serial bonds. Chapt. 16 LT Debt

  6. TYPES OF BONDSp.738 • Registered bonds are issued in the name of the owner and have interest payments made by cheque to bondholders of record. • Bearer or coupon bonds are not registered; thus bondholders must send in coupons to receive interest payments. Chapt. 16 LT Debt

  7. TYPES OF BONDSp.738 • Convertible bonds permit bondholders to convert the bonds into common shares at their option. • Redeemable (callable) bonds are subject to call and retirement at a stated dollar amount prior to maturity at the option of the issuer. • Retractable bonds are subject to redemption prior to maturity at the option of the holder. Chapt. 16 LT Debt

  8. Bond (NOT James) Bond p. 739+ Issuing Company (borrower) Interest Rate % (Coupon rate per year paid semi-annually) When principal is repaid - TIME Current trading price cents/$ Effective current ROI • Market Value  discount / premium; Debt “Rating”; Chapt. 16 LT Debt

  9. “what is it worth”? • Market Value  discount / premium • Debt “Rating” • The market value of a bond is equal to the present value of all the future cash payments promised by the bond. Chapt. 16 LT Debt

  10. INTEREST RATES AND BOND PRICES, Ill. 16-7, p. 742 Market Interest Bonds Sell Rates at 4% Premium Bond Contractual Interest Rate 5% Issued when 5% Face Value 6% Discount Chapt. 16 LT Debt

  11. Example: Nortel has listed in their AR 200 million 6.88% note (i.e. debt or bonds) due Sept 1, 2023. Issued Sept 1998 at par, semi annual interest Issue date: Cash 200,000,000 Bonds payable 200,000,000 Sept 1, ‘03 Bond Interest Expense 6,880,000 Cash 6,880,000 Dec 31 ‘03 Bond interest expense 4,590,000 Accrued interest expense payable 4,590,000 March 1 ‘04 Bond interest expense 2,290,000 Bond interest payable 4,590,000 Cash 6,880,000 Sept 1 ’23 Bond payable 200,000,000 Cash 200,000,000 Chapt. 16 LT Debt

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