Chapter 10- Longterm Liabilities Flashcards
What is bond financing?
borrowing money to fund a large/expensive project
require to pay interest semi-annually (2x per year)
What is the issuer?
company borrowing the money
What is the bondholder?
the lender
What is par value?
“face amount”- the amount the bond is paid back at (the total value of the bond)
Paid back on “date of maturity”
What are the 2 types of bonds?
Secured and unsecured
What are secured bonds?
-Have property backed as “collateral”
-If the bond is not repaid the bondholder can take the collateral
**Preferred
What are unsecured bonds?
-Banked by the borrowers credit standing
-Based on previous spending and payments (timely/for full amount)
**Riskier
What are the 2 rates?
Market rate vs. Contact Rate
What is market rate?
-The rate the borrowers and lenders are willing to pay and accept for bonds on the open market
What is contract rate?
-The actual amount agreed upon between a specific bond holder and issuer
- Interest = Par Value x Contract rate (annual rate) x 1/2
What are the advantages to bonds?
-Does not change ownership % like investors/equity would
-“return on equity”- made more income than amount paid out in interest
What are the disadvantages to bonds?
-May lose collateral if a secured bond
-Required to back par value AND interest
-“return on equity”- made less income than amount you spent in interest
What are the 3 ways to issue bonds?
At Par Value, Below Par Value, Above Par Value
What is At Par Value?
-contract price=market price
-issue price= par value
What is Below Par Value?
-contract rate < market rate
-issue prices < par value
-Discount- I received less money upfront AND must pay back more (need cash now; make a good return on equity)
**Bad for borrower
What is Above Par Value?
-contract > market
-issue price > par value
-premium- receive more money upfront AND pay back less (still bond holders; business —> economy; just is down)
**good borrower
What are discounts on bond?
-below par value
-issuer rec. less money upfront
-must pay back par value at date of maturity
***interest is ALWAYS calc. on par value
What is the account Discount on Bonds Payable?
-contra liability
-NB: debit
What is amortizing of discount and premiums?
-amortize over the life of the bond at every interest payment using straight line
What are premiums?
-issue price > par value
-we receive more money upfront and pay back less
What is the account premium on bonds payable?
-liability
-NB: credit
What is debt to equity?
-ratio
-its a measure of how risky a company’s financing structure is
What is the equation for debt to equity?
total liabilities/ total equity
higher the ratio the riskier to company; that means liability > equity (a lot to pay back)
