Chapter 11.docx

4 Pages
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Department
Financial Accounting
Course Code
MGAC02H3
Professor
G.Quan Fun

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MGTB06 Chapter 11: Reporting and Interpreting Non-Current Liabilities Private placement: raising debt from banks, insurance companies, and pension fund companies Note payable: a written promise to pay a stated sum of money at one or more specified future dates (maturity date) Bonds: the amount payable at the maturity of the bond. It is also the basis for computing periodic cash interest payments  Requires payment of interest over its life  The amount payable at the maturity date  The basis for computing periodic cash interest payments Par Value and Face Amount: other names for bond principal or the maturity value of a bond Stated Rate: the rate of interest per period specified in the bond contract Different types of bonds have different characteristics, for good economic reasons; different types of creditors have different types of risk and return preference Unsecured Bond/ Secured Bond  No assets are pledged as a guarantee of repayment at maturity  Specific assets are pledged as a guarantee of repayment at maturity Callable Bond/ Convertible bond  Bond may be called for early retirement by the issuer  Bond may be converted to common shares of the issuer Debenture: an unsecured bonds; no assets are specifically pledged to guarantee repayment Callable Bonds: may be called for early retirement at the option of the issuer Convertible Bonds: may be converted to other securities of the issuer (usually common shares) Indenture: a bond contract that specifies the legal provisions of a bond issue Bond Certificate: the bond document that each bondholder receives Trustee: an independent party appointed to represent the bondholders Bonds dealers sell bonds to institutional investors such as banks, insurance companies, and mutual and pension funds. They also create a secondary market for bonds by trading them for their own account in response to supply and demand by institutional investors. The market for bonds exceeds the value of stocks traded on a typical day because of the high value of each trade. MGTB06 Because of the complexities associated with bonds, several agencies exist to evaluated the probability that a bond issuer will be not able to meet the requirements specified in the indenture The higher the risk of default, the higher will be the interest rate required to successfully protecting the bondholder Bond prices change  Changes in creditworthiness of the bond issuer  Changes in interest rates Bond Indenture specifies two types of cash payments:  Principal: a single payment made when the bond matures o Aka par or face value  Cash interest payments: payments are computed by multiplying the principal amount times the interest rate, called the contract, stated, or coupon rate of the interest stated in the bond contract o Payment are made quarterly, semi-annually, or annually Market Interest Rate: the current rate of interest on a debt when incurred (aka yield, effective interest rate) Bond premium: the difference between the selling price and par when the bond is sold for more than par Bond discount: the difference between the selling price and par when the bond is sold for less than par Bonds Issued at Par Bonds sell at their par value when buyers are willing to invest in them at the interest rate stated on the bond. The amount of money a corporation receives when it sells bonds is the present value of the future cash flows associated with them. When the effective rate of interest equals the stated rate of interest, the present value of the future cash flows associated with a bond always equal the bond’s par value. Bonds Issued at a Discount Bonds sell at a discount when the market rate of interest demanded by the buyers is higher than the stated interest rate offered by the issuer Under the effective interest method, interest expense for a bond is computed by multiplying the current unpaid balance times the market rate of interest that existed on the date the bonds were sold. Interest Expense = unpaid balance x effective interest rate x n/12 Amortization Amount = amortization of bond discount = interest expense – interest paid (or accrued) Interest expense increases each year during the lift of the bond because the amortized bond discount reflects unpa
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