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Chapter 10

MGT 11A Chapter 10: CHAPTER 10 - pt 1


Department
Management
Course Code
MGT 11A
Professor
John Hancock
Chapter
10

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CHAPTER 10: REPORTING AND ANALYZING LONG-TERM LIABILITIES
BASIC OF BONDS
Bond Financing
Projects that need a lot of money often are financed with bonds
Bond: issuer’s written promise to pay the par value of the bond (face value) with interest
Paid at the stated future date (maturity date)
Most bonds require the issuer to make semiannual interest payments
Interest computed by multiplying the par value by the bond’s
contract rate
Advantages of Bonds
1) Bonds do not affect owner control
2) Interest on bonds is tax deductible
3) Bonds can increase return on equity
Company that earns a higher return with borrowed funds than it pays in
interest on those funds increases its return on equity: financial leverage
Disadvantages of Bonds
1) Bonds can decrease return on equity
When a company earns a lower return with the borrowed funds than it
says in interest, it decreases return on equity
More likely when a company has low income or losses
2) Bonds require payment of both periodic interest and the par value at maturity
Bond Issuing
Bond issuances state number of bonds authorized, their par value, and the contract
interest rate
Bond Indenture: legal contract between issuer and bondholder
Identifies parties’ rights and obligations
Bond certificate: document containing bond specifics such as issuer’s name,
bond par value, contract interest rate, and maturity date that bondholder may
receive
Bond Trading
Bond issue: sale on bonds
After bonds are issued, they often are bought and sold among investors, meaning that a
bond probably has had many owners before it matures
PAR BONDS
Par Bonds: bonds issued at par value
Ex: Nike issues $100,000 of 8%, 2-year bonds dated Dec 31, 2018, that matures on Dec
31, 2020, and pay interest semiannually on June 30 and Dec 31. If all bonds are sold at
par value,
Ex: Nike records the first semiannual interest payment as follows. The same entry is
made every 6 months, including at the maturity date
Ex: when the bonds mature, Nike records its payment of principal as follows
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