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Chapter 14

COMMERCE 3AC3 Chapter Notes - Chapter 14: Promissory Note, Private Placement


Department
Commerce
Course Code
COMMERCE 3AC3
Professor
Justin Y Jin
Chapter
14

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Chapter 14: Long-Term Financial Liabilities
-Long-Term debt: obligations that are not paid within one year or one business operating cycle
and examples include:
-bonds payable
-long-term notes payable
-mortgages
-often the long-term debt has restrictive covenants (terms) attached that are used to limit
activities to protect both the lender and the borrower
Bonds and Notes Payable
-bond indenture: a promise (by the lender to the borrower) to pay:
-a sum of money at the designated date and
-periodic interest at a stipulated rate on the face value
-bonds can be sold through an investment banker or by a private placement
-Notes Payable are similar to bonds in the fact that it requires a repayment of the principal at the
future date along with periodic interest payments; the difference is that notes payable are not
usually sold on the public market
Types of Bonds/Notes
-Bearer (coupon) bonds: a bond that is not recorded in the owner’s name and may therefore
be transferred from one owner to another
-Secured Debt: debt that is secured by collateral (i.e. real estate)
-Term Bonds: bonds that mature on a single date
-Serial Bonds: bond that mature in instalments
-Income and Revenue Bonds: income bonds pay no interest unless the issuing company is
profitable; revenue bonds’ interest is paid from a specific revenue source. Both of these bonds
have their interest tied to some form of performance
-Deep-Discount Bonds: little or no interest payments, sold at a substantial discount
-Convertible bonds: allows the owner to convert the bond into another corporate security
-Bond ratings can range from Prime to very speculative
-Defeasance: setting aside sufficient funds (i.e. in a trust fund) to pay off principal and interest
of debt
-legal defeasance is when the creditor no longer has claims on the asset and the trust is
held responsible for the repayment
-Financing is generated through 3 main sources:
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