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Financing Part I: Debt. Chapter 14 in Spiceland See example excel files examples File names: Bonds and Leases. Topics:. Liabilities Notes Bonds Leases Current portion of non-current liabilities Non-current liabilities expected to be refinanced. Non Current Liabilities:.
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Financing Part I: Debt Chapter 14 in Spiceland See example excel files examples File names: Bonds and Leases
Topics: • Liabilities • Notes • Bonds • Leases • Current portion of non-current liabilities • Non-current liabilities expected to be refinanced
Non Current Liabilities: • Notes ( longer than one year) • Mortgage notes • Car loan • Bonds
Bonds: • Types • Terms • Issuance • Calculation of price • Rules • Interest determination • Retirement
Bonds (Types): • Bearer Bonds - Registered bonds • Callable bonds • Convertible bonds • Coupon bonds - Zero coupon bonds • Debenture bonds • Mortgage bonds • Serial bonds • Junk bonds – Deep discount bonds
Bonds (Terms): • Indenture document – bond covenant • Underwriters • Face value - Maturity value • Coupon rate • Discount rate - yield rate – effective rate • Issue price • Premium - discount
Bonds: Issue Price: • Maturity value * Coupon rate = interest payment I.e., (100,000 * .1 = $10,000 • Bond interest paid semi-annually --- interest payment/2 I.e., ($10,000/2 = $ 5,000 • Discount Maturity value using discount rate: $100,000 * PV (r, i) • Discount interest payments: $5,000*PVA(r.i) • PV of maturity value + PV of interest payments = Issue price • Difference between maturity value and issue price = Premium or (discount)
Issue Price Example (1): Maturity value = $100,000; coupon rate = 10%;term: 10 years; discount rate: 8% 100,000 *PV(4%, 20) = .45639 = $ 45,639 100,000 * .1/2 = $5,000 *PVA(20,4%) = 13.59033 = 67,952 Issue Price $113,591 Dr. Cash $113,591 cr. Bonds payable $100,000 Cr. Premium $ 13,591
Issue Price Example (2): Maturity value = $100,000; coupon rate = 10%;term: 10 years; discount rate: 12% 100,000 *PV(6%, 20) = . .31180 = $ 31,180 100,000 * .1/2 = $5,000 *PVA(20,6%) = 11.46992 = 57,350 Issue Price $ 88,530 Dr. Cash $ 88,530 Dr. discount $ 11,470 cr. Bonds payable $100,000
Retirement at Maturity Final interest payment: • Dr. Interest expense $5,943 • Cr. Discount $ 943 • Cr. Cash $ 5,000 • Payment of Maturity Value: • Dr. Bond payable $100,000 • Cr. Cash $100,000
Repurchase After 5 Years Bond market value: $ 97,000, carrying value: $92,112 ) (cash includes $5,000 for interest payment) • Dr. Interest expense $ 5,527 • Dr. Bond payable $ 100,000 • Dr. loss on early retirement $ 3,834 • Cr. Discount $ 7,361 • Cr. Cash $ 102,000
Called After 5 Years Bond market value: $ 106,000, carrying value: $92,112; Called at: 101 (% of maturity value)(cash includes $5,000 for interest payment) • Dr. Interest expense $ 5,527 • Dr. Bond payable $ 100,000 • Dr. loss on early retirement $ 7,834 • Cr. Discount $ 7,361 • Cr. Cash $ 106,000
Converted After 5 Years Bond market value: $ 97,000, carrying value: $92,112; converted into common stock. • Dr. Interest expense $ 5,527 • Dr. Bond payable $ 100,000 • Cr. Discount $ 7,361 • Cr. Cash $ 5,000 • Cr. Common Stock $ 93,166
Early Retirement: • Gain or loss used to be treated as an extraordinary event (FAS 4) • No longer the case ----- FAS 145: now early retirement leads to ordinary gain or loss
Current Portion of Long Term Debt • Needs to be reclassified from non-current to current – However: • If company has both the intent and the ability to refinance then separate category between current and non-current
