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Controversial Issue

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CHAPTER 10: LONG TERM LIABILITIES

There are two ways for a company to raise money: Debt VS. Equity
Chapter 10 covers Bonds –a type of debt financing.

Individuals, companies, and governments often issue bonds in order to raise funds to finance large projects (ex. prop 1A on the November ballot was to help the state of California raise capital to develop a high speed train).

Bond – a written promise to pay an amount (par value) plus interest.

Bonds offer the following advantages: 1. Bonds do not affect the ownership of the company. 2. Interest on bonds is tax deductible. 3. Bonds can increase the company’s return on equity.

Bonds offer the following disadvantages: 1. Bonds require periodic payment of interest and then par value at the bond’s maturity date. 2. Bonds can decrease the company’s return on equity.

Terms ➢ Bond Certificate – legal document between the issuer (company) and the bondholder (investors). Bond certificates include the following information: o Par Value o Maturity Date o Contract Interest Rate

➢ Par Value – the specific amount (or principal) that the issuer, or company, must pay at the bond’s maturity date. The par value is also referred to as face value or face amount.

➢ Contract Interest Rate – the rate used to determine the amount of cash interest the borrower pays and the investor receives. Also referred to as the stated or coupon interest rate.

➢ Maturity Date – specific future date when the bond’s par value is due to the bondholders.
Bond Discount or Premium

Contract Interest Rate > Market Interest Rate => Premium
Contract Interest Rate = Market Interest Rate => At Par
Contract Interest Rate < Market Interest Rate => Discount

A Discount on Bonds Payable occurs when a company issues bonds with a contract

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