AFM391 Chapter Notes - Chapter 14: Effective Interest Rate, Unsecured Debt, Premium Bond
21 Feb 2017
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Long-term debt consists of obligations not payable within a year or operating cycle of the business, whichever is longer, and will require sacrifices of economic benefits in the future. Examples include bonds payable, long-term notes payable, mortgages, pensions, and leases. The board of directors and shareholders usually have to approve for debt to be issued. Debt arrangements come in contracts and state the interest rate, due date, call provisions, collateral, and sinking fund requirements. Restrictive covenants are terms or conditions that limit activities and protect both lenders and borrowers. A bond is created by a contract known as a bond indenture which represents a promise to pay maturity value and interest rates (usually paid semi-annually). In firm underwriting, investment banker will assume risk by guaranteeing a sum to the issuing company and take the risk and sell the bonds themselves. In best efforts underwriting, investment banker will receive a commission on each sale of a bond.
