300469 Flashcards
Blue Corp.’s December 31, 2005, balance sheet contained the following items in the long-term liabilities section:
9-3/4% registered debentures
(callable in 2010 and due in 2015) $700,000
9-1/2% collateral trust bonds (convertible into
common stock beginning in 2008 and due in 2018) 600,000
10% subordinated debentures ($30,000 maturing
annually beginning in 2005) 300,000
What is the total amount of Blue’s term bonds?
$1,000,000
$1,300,000
$700,000
$600,000
$1,300,000
Term bonds are bonds which are scheduled to be outstanding for a fixed period of time, or term.
Blue Corp.’s term bonds include:
9-3/4% registered debentures $ 700,000
9-1/2% collateral trust bonds 600,000
Total term bond $1,300,000
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Note: The 10% subordinated debentures are serial bonds, bonds which mature at regular intervals over a specified time period.
Bond
A bond is a type of debt instrument or debt security in the name of the issuing party (a government or corporation) usually issued in denominations of $1,000. It is a legal document representing a long-term obligation to pay interest at a specified rate at specified intervals and to repay a specified amount (the principal) on a specified future date (at maturity). A bond represents a liability or debt to the issuer and is senior to (paid before) capital stock. A bond carries less risk than capital stock. The holder is the creditor, and the maker or issuer is the borrower or debtor. A bond is usually negotiable and can be sold or transferred, with the transferee becoming the holder in due course.
Bonds are classified in the following ways:
Character of the issuer: Federal, municipal (the interest received from which is tax-exempt), or corporate (industrial)
Character of the security: Secured, unsecured (debenture), or guaranty
Payment of interest: Ordinary, income, participating, registered, bearer, or coupon
Maturity of principal: Ordinary, callable, redeemable, convertible, or serial
In the United States, new corporate bond issues must be registered for tax reporting purposes, so bearer or coupon bonds are no longer issued by U.S. corporations.
Callable
To make something callable means there is a provision that at the issuer’s option the preferred stock or bond can be called in for cancellation or payment at a specified price (usually greater than the original issue price) during a specified time period (prior to bond maturity). Called shares are not considered treasury shares.
Also, liabilities can be callable at the option of the creditor (i.e., the creditor has the right to demand repayment of a liability at a given date).
Convertible
A convertible provision is a provision specifying that a debt instrument or preferred stock can be exchanged for (converted into) other securities of the issuing corporation, usually common stock, at the option of the debt holder or stockholder at a specified rate within a specified time period. The conversion rate specifies as a ratio the number of shares of common stock that will be issued upon the conversion of some unit of the convertible instrument or security (e.g., 3:1, three shares of common for each share of preferred or three shares for each $1,000 bond). A convertible provision is an important consideration in the computation of earnings per share. Converted preferred shares are formally retired.
A convertible provision is recorded on the basis of the book value of the converted security.
Debenture
A debenture is an unsecured promissory note (bond) to pay a specified amount on a specified date.
Serial Bond
Serial bonds are a set of related bonds issued at the same time but which mature at intervals over time, e.g., total issue of $90 million matures in six installments of $15 million each at 3-year intervals beginning in year 5.
Subordinate
Subordinate is a ranking below another comparable item (e.g., subordinated debt) or a person with less authority.
Term Bond
Term bonds are bonds that are scheduled to be outstanding for a fixed period of time, or term.
2282.01
Computation of Issue Price
When a bond is issued, the bond contract (indenture) specifies the amount and timing of payments the issuer is obligated to pay. The issuer will pay the following:
The face or principal amount at the maturity date of the bonds
Interest at specified intervals, usually semi-annually, during the life of the bond based on a stated percentage of the face amount
The interest rate stated in the bond contract is known variously as the stated, coupon, contract, or nominal rate.
