Bond Market Flashcards
Issuing Shares
Creates no liabilities or interest expense.
Less risky to the issuing corporation.
Issuing Notes or Bonds
Does not dilute share ownership or control of the corporation.
Results in higher earnings per share because the earnings on borrowed money usually exceeds interest expense
Times-Interest-Earned Ratio
= Operating Income / Interest Expense
A high interest-earned ratio indicates ease in paying interest expense
A low interest-earned ratio indicates difficulty in paying interest expense
Reporting Fair Market Value of Debt
All financial liabilities must be measured for reporting purposes at amortized cost using the effective-interest method.
Current Liabilities
obligations due within one year or within the company’s normal operating cycle if longer.
Known amountEstimated amount
Known Current Liabilities
Accounts payable Short-term notes payable Goods and services tax payable Sales tax payable Accrued expenses Payroll liabilities Unearned revenues Current portion of long-term debt Current portion of capital leases
Current Liabilities
obligations due within
one year or within the company’s normal
operating cycle if longer.
Why Issue Bonds?
Notes Payable and Leasing rarely provide enough money for plant expansion and large projects. To obtain large amounts of longterm capital, management must decide to issue bonds or to use equity financing (common stock)
Types of Bonds
Secured and Unsecured Bonds
Term and Serial Bonds
Registered and Bearer Bonds
Convertible and Redeemable/Retractable Bonds
Determining the market value of bonds
s
Issuing Bonds at Face Value
The amount of principle due at the maturity date.
Issuing Bonds at a Discount
s
Issuing Bonds at a Premium
s
Redeeming Bonds at Maturity
s
Redeeming Bonds before Maturity
s
Converting Bonds into Common Stock
s
Long-term Notes Payable
s
Lease Liabilities
s
Other Long Term Liabilities
Lease Liabilities
Long-term Notes Payable
Accounting for Bond Retirements
Redeeming Bonds at Maturity
Redeeming Bonds before Maturity
Converting Bonds into Common Stock
Accounting for Bond Issues
Issuing Bonds at Face Value
Discount or Premium on Bonds
Issuing Bonds at a Premium
Issuing Bonds at a Discount
Bond Financing Advantages
- Shareholder control is not affected.
- Tax savings result.
- Earnings per share on common stock may be higher.
Secured Bonds
Specific assets of the issuer are used as collateral for the bonds.
Mortgage Bonds
Sinking Fund Bond
Term
Bonds that are due for payment (mature) at a single specified future date
Registered Bonds
Bonds issued with the name of the owner and payments are made by cheque or direct deposit to the bond holder. Transfers of registered bonds requires cancellation of the bonds by the institution and issuance of new bonds.
Convertible Bonds
can be converted into shares by the bondholder.
Unsecured Bonds
Debenture Bonds are issued against the general credit of the borrower. Used extensively by large corporations with good credit ratings.
Serial Bonds
Bonds that mature in instalments
Bearer Bonds
Bearer (or coupon) bonds, holders are required to send in coupons to receive interest payments. Bearer bonds can be transferred directly to another party.
Redeemable Bonds
Issuer can retire at a stated dollar amount prior to maturity . Also known as “callable bonds.”
Retractable Bonds
Can be redeemed prior to maturity at the option of the bond holder
Junk Bond
High risk, unsecured bond which pays a high rate of interest
Stripped Bond
Low risk, deep discount or zero interest bond. Pays very little or no interest.
Contractual Interest Rate (Bonds)
Rate stated on bond certificate; stated as an annual interest rate, and interest is generally paid semi-annually
