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Introduction to Corporate Bonds

Introduction to Corporate Bonds. Legal Document. Publicly Traded . Raise Capital. Let’s look at some terms. Underwriters. Bond Indenture. Serial vs. Term. Secure vs. Unsecure. Face, Par, Principal. Contract vs. Market Rate of Interest. Callable vs. Convertible. Bond Terms. Wow

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Introduction to Corporate Bonds

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  1. Introduction to Corporate Bonds Legal Document Publicly Traded Raise Capital

  2. Let’s look at some terms. Underwriters Bond Indenture Serial vs. Term Secure vs. Unsecure Face, Par, Principal Contract vs. Market Rate of Interest Callable vs. Convertible

  3. Bond Terms Wow Let’s get started

  4. Underwriters Corporate staff may not have the time or expertise, so they Outsource the work to underwriters, Investment banks and brokerage firms: • Manage all aspects of the bond issuance • Charge a fee

  5. Bond is a formal legal document has a variety of features needs proper wording, fine print and disclosures Bond Indenture

  6. Serial vs. Term Serial Bonds A portion of the principal matures at regular intervals Have a plan for paying the principal Term Bonds All of the principal matures at once

  7. Secure vs. Unsecure Secure Backed by corporate assets Creditors – Pay attention! Unsecure Backed by the general credit of the corporation Debenture Bonds

  8. Face, Par, Principal • Interchangeable Terms • Refer to the amount that must be repaid at maturity Due at maturity

  9. Interest Rates • Contract Rate • Stated on the bond • Determines cash due on • interest payment dates Stated Rate Remains constant • Market Rate • Market driven • Determines • Issue price • Interest expense Effective Rate Fluctuates

  10. Callable vs. Convertible Callable Corporation can pay off debt early Corporation decides Convertible Bondholders can swap bonds for shares of corporate stock Bondholder decides

  11. ABC Corporation Minimum Information Issue Date Maturity Date Contract Interest Rate Principal Interest Payment Dates

  12. ABC Corporation 1/1/20X1 20 years Issue Date Maturity Contract Interest Rate 8% $500,000 Principal Interest Dates: 6/30 and 12/31 Interest Payment Dates

  13. Interest Computation Interest due every 6 months • 6/30 and 12/31 $500,000 X .08 X 6/12 = $20,000 $500,000 X .04 = $20,000

  14. Journal Entries 1/1/X1 – ABC Corp issues $500,000, 20 year, 8% bonds at par (100%)

  15. Journal Entries 6/30/X1 – ABC Corp pays interest

  16. Journal Entries 12/31/XX21 – ABC Corp pays the principal

  17. Balance Sheet Presentation ABC Corporation Balance Sheet 12/31/X1 Long-term Liabilities Bonds Payable $500,000

  18. Advanced Topics Bond Discounts Bond Premiums Bond Retirements and Conversions Adjusting Entries Bond Issue Price

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