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Reporting and Interpreting Bonds
Chapter 10
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA
McGrawHill/Irwin Copyright © 2011 by The McGrawHill Companies, Inc. All rights reserved.
Understanding the Business
The mixture of debt and equity used to finance a company’s operations is
called the capital structure:
Debt - funds from creditors
Equity - funds from owners
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Characteristics of Bonds Payable
Advantages of bonds:
• Stockholders maintain control because bonds are debt, not equity.
• IInterest expenseiis ttax deductible.
• Theiimpact on earnings iis positive because money can often be borrowed at a low interest rate and
iinvested at a higher
Disadvantages offbonds:: • Risk of bankruptcy exists
because the interest ands
fscheduled ortcreditors will • Negative impactton cash
iinterest andtprincipal must
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Characteristics of Bonds Payable
Two types of cash payment in the bond contract: 1. Principal.
2. Cash interest payments.
Bond Terms 1.Principal, par value and face value
2.Contract, stated, or coupon rate of interest
3.Market, yield, or effective-interest rate
104
Characteristics of Bonds Payable
An indenture is a bond contract that specifies the legal provisions of a bond issue.
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Debenture bonds
No assets are pledged as guarantee of frepayment tat tmaturity.. Secured bonds
Specific assets are pledged as guarantee ofrrepayment at
maturity. Callable bonds
Bond may be called forrearly retirement tby the issuer..
Convertible bonds
Bond may be converted to otherrsecurities (usually common stock).
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