LONG TERM DEBT - BONDS

Question 1

Non-current liabilities (long-term debt)

Answer 1

consist of an expected outflow of resources arising from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer
more than 1 year (otherwise current)

Question 2

examples of non current liabilities

Answer 2

Bonds payable
Long-term notes payable
Mortgages payable
Pension liabilities
Lease liabilities

Question 3

what are restrictions/covenants?

Answer 3

• conditions that can protect bondholders instead of lenders
• every time that a firm issues a bond → needs money –> bondholders → 1st risk: the company has to pay the interest back (much safer)

Question 4

Types of Bonds

Answer 4

Secured and Unsecured (debenture) bonds
Term, Serial, and Callable bonds
Convertible, Commodity-Backed, Deep-Discount bonds
Registered and Bearer (Coupon) bonds
Income and Revenue bonds

Question 5

Bond contract/indenture

Answer 5

-represents a promise to pay:
1. sum of money at designated maturity date, plus
2. periodic interest at a specified rate on the maturity amount (face value)

-Paper certificate, typically a €1,000 face value
-Interest payments usually made semiannually
-Used when the amount of capital needed is too large for one lender to supply

Question 6

if price of bond is higher than face value:

Answer 6

generates a PREMIUM:
- price > face value
- yield < coupon rate

Question 7

bond issued at par

Answer 7

• yield rate = coupon/ steady rate

Question 8

Discount when:

Answer 8

• yield rate > coupon rate
• price < face value

Question 9

which one is the best situation for bondholder?

Answer 9

discount = higher probability of gaining

Question 10

difference between coupon and yield

Answer 10

coupon = nominal stated rate, written in terms

yield = market rate, rate that provides an acceptable return commensurate with the issuer risk

Question 11

how to calculate amount of interest that is actually paid to bondholder?

Answer 11

stated rate*face value of the bond

Question 12

how to calculate amount of interest that is actually recorded as interest expense by the issuer?

Answer 12

yield rate*carrying value fo bond

Question 13

When bonds sell at less than face value:

Answer 13

• Investors demand a rate of interest higher than stated rate
• Usually occurs because investors can earn a higher rate on alternative investments of equal risk
• Cannot change stated rate so investors refuse to pay face value for the bonds
• Investors receive interest at the stated rate computed on the face value, but they actually earn at an effective rate because they paid less than face value for the bonds

Question 14

Effective-Interest Method
Bond issued at a discount

Answer 14

amount paid at maturity is more than the issue amount

Question 15

Effective-Interest Method
Bonds issued at a premium

Answer 15

company pays less at maturity relative to the issue price

Question 16

effective interest method

Answer 16

produces a periodic interest expense equal to a constant percentage of the carrying value of the bonds

Question 17

amortization amount

Answer 17

(carrying value of bonds at beginning* effective interest rate) - (face amount* coupon rate)

Question 18

amount of interest expense

Answer 18

• that the company has to recognize starting from carrying value of bonds
• discount amortized = interest expense - cash paid
• tot is exactly the amount that corresponds to discount on bonds payable
• add it to carrying amount of bonds