Financial - Liabilities

bonds are similar to notes payable, except

bonds are usually issued to many lenders at the same time.

Soprano Design Services issued a $10,000 four-year, 5% bond on January 1, 2007. The bond interest is paid each December 31. Assume that Soprano's bonds were sold to yield 6% (market interest rate). What will be the total issue price? From the present value of $1 table, if n=4 and i = 5%, 0.8227; if n=4 and i = 6%, 0.7921 From the present value of annuity of $1 table, if n=4 and i = 5%, 3.5460; if n=4 and i = 6%, 3.4651

1.find interest payments $10,000*.05=$500 $500*3.4651 = $1732.55 2. find face value 10,000*.7921 = $7921 $7921 + $1732.55 = $9654 $9654 = total issue price = discount

Bond Indenture

is a contract between a firm issuing bonds and the corporations or individuals who purchase the bonds as investments.

Issue price of a bond

is calculated as the present value of the face amount plus the present value of the periodic interest payments. -face amount -below face (discount) -above face (premium)

Callable bonds

-allows the borrower to repay the bonds before their scheduled maturity date at a specified call price -most corporate bonds are callable, or redeemable -call price is stated in the bond contract and usually exceeds the bonds face amount

stated interest rate

-rate quoted in the bond contract used to calculate the cash payments for interest.

secured and unsecured bonds

-secured bonds - are supported by specific assets the issuer has pledged as collateral -unsecured bonds (debentures) - are not backed by a specific asset. secured only by the "full faith and credit" of the borrower.

term and serial bonds

-term bonds - require payment of the full principle amount of the bond at a single maturity date (most bonds) -serial bonds- require payments in installments over a series of years. -it makes it easier for the borrow to meet its bond obligations as they become due.

Market interest rate (effective rate)

-true interest rate used by investors to value a companys bond issue. -the higher the market interest rate, the lower the bond issue price will be. always use market rate, only use stated rate for when calculateing interest payments

convertible bonds

-while callable bonds benefit the borrower, convertible bonds benefit both. -convertible bonds allow the lender to convert each bond into a specified number of shares of common stock -for example $1000 convertible bond can be converted to 20 shares of common stock. -the borrower also benefits. convertible bonds sell at a higher price and require a lower interest rate than bonds without a conversion feature.

Capital structure

mixture of liabilities and stockholders equity used by a business

Bonds can be

secured/unsecured term/serial callable/convertible

if we know the amount in the future, but need to know the present value, use the same procedure, but use a present value instead of future value.

so, take the future amount * the amount found on the table to find the present value that you need to invest today.

To find the future value

take the number of compounding periods (n) and the interest rate per period (i) and find the future value of $1. then take that number and * it by the present value to find the future value.

usually interest on bonds is paid

twice a year