Ch 14 Bonds And Long Term Notes

Front 1

Effective Rate Method:

Back 1

The effective market rate x the amount of debt outstanding

Front 2

Long term liabilities are reported at their

Back 2

present values

Front 3

Features of Note Payable (3)

Back 3

Typical FV of $10,000

Tend to at last 10-30 years

Paid interest Semi-annually

Front 4

Features of Bonds (6)

Back 4

Usually sold to investment banks

Firm underwriting

Best efforts underwriting

Private placement (single investor)

Interest Rate (stated/coupon) a % of FV

Investor Return = effective rate (yield / MR)

Front 5

Mortgage Bond

Back 5

A mortgage bond is a bond secured by a mortgage on one or more assets.

These bonds are typically backed by real estate holdings and/or real property such as equipment

Front 6

Sinking Fund

Back 6

a fund formed by periodically setting aside money for the gradual repayment of a debt or replacement of an asset.

Front 7

Callable

Back 7

Allows the issuing company to buy back, or call, outstanding bonds from bondholders before their scheduled maturity date

Front 8

Convertible Bonds

Back 8

Bondholders choosing to convert bonds into shares of stock

Front 9

$700,000, 12% bond issued

MR or ER is 14%

Back 9

Discount (debit)

Front 10

$700,000, 12% bond issued

MR or ER is 10%

Back 10

Premium (credit)

Front 11

A price quote of 98 means:

A price quote of 101 means:

Back 11

a $1000 bond will sell for $980

a $1000 bond will sell for $1010

Front 12

Outstanding Balance 500,000

Effective Rate 12%

Interest recorded semi-annually

What is the effective interest?

Back 12

500,000 x (.12/2) = 30,000 Effective interest

Front 13

700,000 x (.06/2 SR) = 42,000

666,633 x (.12/2 ER) = 46,664

What does the remainder 4,664 go?

Back 13

4,664 increases the Liability

and is a reduction in the Discount

Front 14

Amortization Schedule

Back 14

(FV x interest rate) - (Effective Rate x Outstanding Balance)

= Discount Reduction

Discount Reduction + Outstanding Balance

= Balance getting closer to FV (carrying value)

Front 15

As the premium is reduced by Amortization, the carrying value:

Back 15

declines toward FV

Front 16

As the discount is reduced by Amortization, the carrying value:

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increases toward FV

Front 17

Borrowing is an ____ activity

Lending is an ____ activity

Back 17

Financing

Investing

Front 18

Paying and receiving interest is an ____ activity

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Operating

Front 19

Early extinguishment of debt

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When debt of any type is retired prior to its scheduled maturity date

Front 20

The difference between the carrying amount of the debt and the reacquisition price on an early extinguishment of debt represents either:

Back 20

a Gain or a Loss

Front 21

Equity - Conversion Option (Intrinsic Value)

Back 21

FV price of stock at issue date

-

Conversion price for shares

Front 22

Under IFRS, Convertible debt is:

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Divided into liability and equity elements

Front 23

A stock warrant gives the investor:

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an option to purchase a stated number of shares of common stock at a specified option price

Front 24

Troubled Debt Restructuring

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Changing the original terms of a debt agreement

Front 25

Troubled Debt can be achieved in 2 ways:

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1. the debt may be settled at the time of the restructuring

2. the debt may be continued, but with modified terms

Front 26

A debtor's gain is the difference between:

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the carrying amount of the debt and the FV of the asset