Chp 14 ACC2 Long-Term Liabilities

1. Bonds do not affect owner control. 2. Interest on bonds is tax deductible. 3. Bonds can increase return on equity.

Advantages of Bond Financing

Straight-line method or effective interest method. Both methods systematically reduce the bond discount to zero over the life of the bond.

Amortizing a bond discount

an issuer's written promise to pay an amount identified as the par value of the bond with interest. page 552

Bond

Includes specifics such as the issuer's name, the par value, the contract interest rate, and the maturity date.

Bond certificate

The legal contract between the issuer and the bondholders.

Bond indenture

If the market rate is higher than the contract rate, the bonds will sell at a discount-less than face value.

Bond sells at a discount

when the Contract rate is equal to the Market rate.

Bond sells at par

If the market rate is lower than the contract rate, the bonds will sell at a premium-more than face value.

Bond sells at premium

is also called the coupon rate, stated rate, or nominal rate.

Contract Rate

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Contract Rate is usually stated on an annual basis, even if interest is paid semiannually

1. Bonds can decrease return on equity. 2. Bonds require payment of both periodic interest and the par value at maturity.

Disadvantages of Bond Financing

occurs when a company issues bonds with a contract rate less than the market rate. This means that the issue price is less than par.

Discount on bonds payable

Multiply the bond par value by the CONTRACT rate.

How to determine annual interest paid

the difference between what gets borrowed and what gets paid back.

Interest

The rate that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level.

Market Rate

The specified future date when the par value of a bond is paid.

Maturity Date

this method allocates an equal proportion of the total bond interests expense to each interest period.

Straight-Line bond amortization

always moves toward the par value

The Carrying Value of Bonds

Multiplying the bond 's par value by it's contract rate of interest.

The amount of interest a bond issuer pays in cash each year is determined by:

is determined by multiplying the par value of the bond by the bond's contract rate of interest for that same period.

The amount of interest paid each period "semi-annually"

also known as the "face amount" or "face value."

The par value of a bond is