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1

bonds

long term debt sold to creditors

2

what are the two promises that bonds make?

1. pay bond principal at maturity
2. pay interest periodically

3

"sold bonds" or "issuance"

YOU borrowed money

4

stated rate

aka "face rate" or "coupon rate"
DETERMINES INTEREST PAYMENT

5

market rate

aka "effective rate" or "yield"
DETERMINES SELLING PRICE OF THE BOND

6

bond indenture

bond contract

7

term bond

all bonds mature on the same date

8

debenture bonds

unsecured bonds
(no collateral, much higher interest rate)

9

callable bonds

corporation reserves right to buy bonds back early at stated price (determined by issuer)

10

convertible bond

can be exchanged for a stated number of shares of stock (determined by the lender)

11

what are the advantages of issuing a bond?

1. interest expense is tax deductible
2. bonds don't dilute ownership

12

what are the disadvantages of issuing a bond?

1. interest expense is a legal obligation
2. you need to have enough tax flow to cover this obligation

13

issuing bonds at a discount

market is more than stated
ISSUE LESS

14

issuing bonds at face value

market equals stated

15

issuing bonds at a premium

market is less than stated
ISSUE MORE

16

selling price

PV of face value + PV of cash interest payments

17

what are the steps to computing the issue price of bonds?

1. make adjustments to compounding periods
2. find interest payments
3. find PV of face (FV*PV(MKT%,n))
4. find PV of interest payments (PMT*PVOA(MKT%,n))
5. Add PV of face and PV of payments to get SELLING PRICE

18

true cost of borrowing

AT THE MARKET RATE
"total interest expense"
cash interest payments+face value-issue price

19

what kind of liability is a premium?

adjunct liability (increase)
eventual reduction of interest "you earn back a little bit of the premium each period"

20

retirement of a bond

"reduction of a bond"

21

what are the two ways you can retire a bond early?

1. callable bonds and pay the call price
2. repurchase through the market and pay the market rate

22

gain on retirement

repurchase price is less than the carrying value
"you pay less than what you owe"

23

loss on retirement

repurchase price is more than the carrying value
"you pay more than what you owe"