BU397 Chapter Notes - Chapter 14: Securitization, Fair Value, Effective Interest Rate
Document Summary
Long-term debt: obligations that aren"t payable within a year or the operating cycle of the business, whichever is longer requires sacrifices of economic benefits in the future. E. g. bonds payable, lt notes payable, mortgages payable, pension liabilities, and lease liabilities. When companies arrange for financing, details of arrangements are documented in legal contracts determine rights and obligations of lender and borrower and state terms (interest rate, due dates, call provisions, property pledged as security, sinking fund requirements) Restrictive covenants: terms/conditions to limit activities and protect both lenders and borrowers. E. g. working capital and dividend restrictions, limitations on incurring additional debt. Additional debt = more risk of insolvency limit to amount of risk that creditors are willing to accept even if some lenders can tolerate more risk than others. Main purpose of bonds: borrow for long-term when amount of capital that is needed is too large for one lender to supply.
