Transcript Long-term Liabilities see “Confederation Birdge…”p. 734 of

Long-term Liabilities: BONDS
see “Confederation Bridge…”p. 734 of text
Text pages734757 (no amortization)
DO: P.766+ Questions;
BE16-1,2,3; E16-1,2; P16-4A
Chapt. 17 LT Debt
1
What are bonds? p.736
• Bonds are a form of ____________ notes
issued by corporations, governments, and
governmental agencies.
• Bonds, like common shares, can be _____ in
small denominations (usually a thousand
dollars), and as a result they attract investors.
No ASSET
• Often __________ against assets; if unsecured
as Collateral
 _____________
• _____________on assets is case of bankruptcy
Financing the Growth of a Company
EQUITY
selling (issuing) more
shares of a company
 Loss
 Lower potential
DEBT
Borrow large sums of
money required to
________ (pay for)
big projects
 Long-term capital to
______ the future
revenues generated
from the acquisition
Chapt. 17 LT Debt
3
BONDS: Pros & Cons p.737
Maintain
Interest is
(p. 737 ill.16-2)
Lower ______ to creditors than equity
________________= “servicing the debt”
________= principal paid back at maturity
Chapt. 17 LT Debt
4
TYPES OF BONDS p.738
• Bonds that mature at a single specified
future date are called___________.
2000 2001 2002
2003
• In contrast, bonds that mature in
installments are called___________.
2000
2001
2002
Chapt. 17 LT Debt
2003
5
TYPES OF BONDS p.738
• _______________are issued in thename
of the owner and have interest payments
made by cheque to bondholders of record.
• ___________________are not registered;
thus bondholders must send in coupons to
receive interest payments.
Chapt. 17 LT Debt
6
TYPES OF BONDS p.738
• ______________permit bondholders to
convert the bonds into common shares
at their option.
• __________________ are subject to
call and retirement at a stated dollar
amount prior to maturity at the option of
the issuer.
• ___________________are subject to
redemption prior to maturity at the
option of the holder.
Chapt. 17 LT Debt
7
Bond (NOT James) Bond p. 739+
Company
Coupon
Loblaws 6.65%
Maturity
Price
Nov8/28 101.81
Yield
6.5%
”;
Chapt. 17 LT Debt
8
“what is it worth”?
Market Value  discount / premium
Debt “Rating”
The market value of a bond is equal to the
present value of all the future cash payments
promised by the bond.
Chapt. 17 LT Debt
9
INTEREST RATES AND BOND PRICES,
Ill.
16-7, p. 742
Market Interest
Rates
Bonds Sell
at
4%
Bond
Issued
Contractual when
Interest
Rate
5%
5%
6%
Chapt. 17 LT Debt
10
Example: Nortel has listed in their AR 200 million 6.88%
note (i.e. debt or bonds) due Sept 1, 2023.
Issued Sept 1998 at par, semi annual interest
Issue date:
Cash
Sept 1, ‘03
Bonds payable
Bond Interest Expense
Cash
Dec 31 ‘03
Bond interest expense
Accrued interest expense payable
March 1 ‘03
Bond interest expense
Bond interest payable
Cash
Sept 1 ’23
Bond payable
Cash
Chapt. 17 LT Debt
11