Chapter 22 Long-Term Bonds Flashcards
A mortgage loan:
is a long-term debt created when a note is given as part of the purchase price of land or buildings.
Bonds payable:
Corporations that need long-term funds often obtain those funds by issuing bonds payable. Bonds payable are long-term debt instruments that are written promises to repay the principal at a future date. Interest is due at a fixed rate that is payable annually, semiannually, or quarterly over the life of the bond. Bonds are similar to notes payable, but the contract is more formal. Bonds are easily transferred from one owner (or bondholder) to another.
Types of Bonds:
Bonds are classified by the following characteristics:
Bonds can be secured by collateral, or they can be unsecured.
Bonds can be registered or unregistered.
Bonds can all mature on the same date, or portions can mature over a period of several years. Mature means to fall due or to become payable.
Types of Bonds:
Bonds are classified by the following characteristics:
Bonds can be secured by collateral, or they can be unsecured.
Bonds can be registered or unregistered.
Bonds can all mature on the same date, or portions can mature over a period of several years. Mature means to fall due or to become payable.
Secured bonds: Bonds for which property is pledged to secure the claims of bondholders.
Secured bonds: Bonds for which property is pledged to secure the claims of bondholders.
Collateral trust bonds:
involve the pledge of securities, such as stocks or bonds of other companies.
a bond indenture:
a bond contract.
debentures:
Unsecured bonds backed only by a corporation’s general credit are called debentures. They involve no pledge of specific property. However, the bondholders do have some protection in case of liquidation. The claims of creditors, including bondholders, rank above those of stockholders. Creditors must be paid in full before stockholders can receive anything.
Registered bonds:
are bonds issued to a party whose name is listed in the corporation’s records. Ownership is transferred by completing an assignment form and having the change of ownership entered in the corporation’s records. Interest is paid by check to each registered bondholder. The corporation maintains a detailed subsidiary ledger, similar to the stockholders’ ledger, for registered bonds. At all times, the corporation knows who owns the bonds and who is entitled to receive interest payments.
coupon bonds:
Some bonds do not require that the names of the owners be registered. These bonds are known as coupon bonds: Unregistered bonds that have coupons attached for each interest payment; also called bearer bonds. The bonds have coupons attached for each interest payment. The coupons are, in effect, checks payable to the bearer. No record of the owner’s identity is kept by the corporation. On or after each interest date, the bondholder detaches the coupon from the bond and presents it to a bank for payment. Coupon bonds are often referred to as bearer bonds because the bearer is assumed to be the owner. Coupon bonds are rarely issued because the IRS requires corporations to report the name, tax identification number, and interest received by each bondholder. State and local governments continue to issue coupon bonds because the interest is not subject to federal income tax.
serial bonds:
Most bonds in an issue mature on the same day. However, serial bonds issued at one time but are payable over a period of years. For example, a corporation might issue serial bonds totaling $10 million, dated January 1, 2013, with $2,000,000 maturing each year for five years, beginning on January 1, 2023. The corporation might find it easier to retire bonds on a serial basis rather than to have all $10 million due on the same date.
Face Value:
The term “face value” also applies to notes payable and notes receivable. It is sometimes known as “face amount.”
Bonds are issued in various denominations. The denomination specified on the contract is called the face value. The typical face value is $1,000 or $10,000.
Face Value:
The term “face value” also applies to notes payable and notes receivable. It is sometimes known as “face amount.”
Bonds are issued in various denominations. The denomination specified on the contract is called the face value. The typical face value is $1,000 or $10,000.
convertible bonds:
give the owner the right to convert the bonds into common stock under specified conditions. For example, an indenture can give the holder of a 20-year, $1,000 bond the right to convert the bond into 50 shares of the corporation’s common stock at any time. When the price of the stock reaches $20 or more ($1,000 bond ÷ 50 shares of stock), the bondholder is likely to convert it into stock.
Callable bonds:
Bonds are frequently callable. Callable bonds: Bonds that allow the issuing corporation to require the holder to surrender the bonds for payment before their maturity date. Call provisions are clearly stated on the bond.
the Call price:
is the amount the corporation must pay for the bond when it is called. Usually the call price is slightly above the face value. If the market interest rate declines below the face interest rate on the bonds, or if the corporation has excess cash, it might call all or part of the bonds and retire them.
Market interest rate:
refers to the interest rate a corporation is willing to pay and investors are willing to accept at the current time.
Face interest rate:
refers to the contractual interest rate specified on the bond. Market interest rate changes constantly. Face interest rate of a bond does not change.
