AFM 101 Chapter 11 Notes.docx

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University of Waterloo
Accounting & Financial Management
AFM 101
Donna Psutka

AFM 101 Chapter 11 Notes Reporting and Interpreting NonCurrent LiabilitiesLongterm Liabilities include notes payable bonds payable debenturesDebt vs EquityProsOwnership not diluted existing owners maintain theirownershipinterest is tax deductiblefinancial leverageConsPrivate Placement Raising debt from a financial service organization such as banks insurance companies etc often settled on a notes payable with a maturity dateA bond usually requires the payment of interests over its life with the repayment of principal on the maturity date1 Bond Principal The amount payable at the maturity due date of the bond It is also the basis for computing periodic cash interest payments aka par value or face amount The par value of most bonds is typically 10002 The Basis for computing periodic cash interest paymentsA bond always specifies a stated rate and timing of period cash interest payments semiannually or annuallyStated Rate The rate of interest per period specified in the bond contractEach periodic interest payments is equal to the principal times the stated interest rateThe selling price of the bond does not affect the periodic cash payment of interestie A 1000 8 bond always pays cash interest of 80 annually or 40 semiannuallyDebenture An unsecured bond no assets are specifically pledged to guarantee repaymentSecured Bond Specific assets are pledged as a guarantee of repayment at maturityCallable Bond Bond may be called for early retirement at the option of the ownerConvertible Bond Bond may be converted to other securities by the issuer usually common sharesIndenture A bond contract that specifies the leagal provisions of a bond issuematurity date rate of interest to be paid and date of each interest payment conversion privileges and covenants designed to protect that creditorCovenants include limitations on new debt that the company might issue in the future limitations on the payment of dividends and required minimum levels of certain accounting ratios reported on the notes of the Statement of Financial PositionManagers prefer less restrictive to avoid limitations in the companys future actionsCreditors prefer more restrictive to reduce the risk of losing their investment
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