GLENCOE / McGraw-Hill

1. GLENCOE / McGraw-Hill

2. Long-Term Bonds

3. Financing Through Bonds Section Objectives • Name and define the various types of bonds. • Explain the advantages and disadvantages of using bonds as a method of financing.

4. QUESTION: What are bonds payable? ANSWER: Bonds payable are long-term debt instruments that are written promises to repay the principal at a future date. Page 812

5. Page 812 Types of Bonds • Secured or unsecured • Registered or unregistered • Single-maturity or serial-maturity

6. Page 812 Secured and Unsecured • Secured: specific property pledged as collateral • Unsecured: backed only by a company’s general credit Unsecured bonds are known as debentures.

7. Page 813 Registered and Unregistered • Registered: issued to a particular purchaser listed in the corporation’s records • Unregistered (coupon): transferred by delivery; coupons attached for each interest payment

8. Page 813 Single-Maturity and Serial-Maturity • Single-maturity: Bonds mature on the same day. • Serial-maturity: Bonds are payable over a period of years.

9. QUESTION: What is a bond indenture? ANSWER: A bond indenture is a bond contract. Page 812

10. Page 812 Trustees • A trustee is named to protect bondholders’ interests. • If bonds are not paid when due, the trustee takes legal steps to sell pledged property and pay off the bonds.

11. Page 813 Other Characteristics of Bonds Convertible Gives the holder the right to convert the bonds into common stock under specified conditions Callable Can be recalled before their maturity date by the issuing corporation

12. QUESTION: What is the call price? ANSWER: The call price is the amount the corporation must pay for the bond when it is called. Page 813

13. Page 813 Interest Rates • The market interest rate is the interest rate a corporation is willing to pay and investors are willing to accept at the current time. • The face interest rate refers to the contractual interest rate specified on the bond.

14. Capital Stock Bonds Payable Page 814 Advantages and Disadvantages of Using Bonds as a Method of Financing • Permanent Capital • Debt • No debt to repay • Must be repaid

15. Capital Stock Bonds Payable Page 814 Advantages and Disadvantages of Using Bonds as a Method of Financing • Stockholders’ Equity • Long-term liabilities • Common stock has no legal requirement for dividends. Preferred stock requirements depend on contract. • Interest must be paid on the bonds.

16. Capital Stock Bonds Payable Page 814 Advantages and Disadvantages of Using Bonds as a Method of Financing • Dividends are not deductible for income tax purposes. • Interest is a deductible expense.

17. Capital Stock Bonds Payable Page 814 Advantages and Disadvantages of Using Bonds as a Method of Financing • Preference dividends on preferred stock are usually slightly higher than interest rates on bonds because there is more risk associated with preferred stock. • Interest rates on bonds are usually slightly lower than dividends on preferred stock.

18. R E V I E W Complete the following sentences: bond indenture A(n) _____________ is a bond contract. Unregistered bonds are also known as _____________. coupon bonds Serial bonds ___________ are payable over a period of years.

19. R E V I E W Complete the following sentences: call price The ________ is the amount the corporation must pay for the bond when it requires the bondholder to surrender the bond before the maturity date. Market interest rate _________________ refers to the interest rate a corporation is willing to pay and investors are willing to accept at the current time. The contractual interest rate specified on the bond is the _______________. face interest rate

20. Thank You for using College Accounting, Tenth Edition Price • Haddock • Brock