HERZING UNIVERSITY ACCOUNTING I (AC 107) CHAPTER 14
LECTURE NOTES - LONG TERM LIABILITIES & BONDS
, Chapter 14 Lecture Notes – Long Term Liabilities
Bonds Financing
In Chapter 13, we learned about one way that companies can get capital/money to grow
their business. Issuing or getting a bond is another vehicle that a company can use to
get money.
While stocks, reduce the ownership interest – bonds do not BUT they increase debt or
liabilities. Bonds have interest that needs to be paid but is tax deductible.
Advantages of Bonds
• Bondholders have no equity in the company
• Interest on bonds is tax deductible
• Bonds can increase return on equity – financial leverage
Disadvantages of Bonds
• Bonds can decrease return on equity
• Bonds require payment of principal borrowed and interest
, Overview of Bonds
Bond Par Value = the “face value” amount of bond
Bond Issue Date = the date that a company sells a bond to the public.
Maturity Date = the date that bond par value is going to be paid
Contract Interest Rate = the interest on the bond
Types of Bonds
• Par Value – Contract rate/interest rate = market rate
• Discounted – Contract rate/interest rate < market rate
• Premium – Contract rate/interest rate > market rate
Watch Video – Bonds at Par, Discount and Premium
Purchasing Bonds
Bonds can be purchased on Wall Street. The amount that a bond is priced at on the
market is shown as a % of their par value.
Example: A bond with par value of $100.00/share priced at $105.00 has a market
value/price of = price/par value or $105.00/$100.00 = 105.00%
LECTURE NOTES - LONG TERM LIABILITIES & BONDS
, Chapter 14 Lecture Notes – Long Term Liabilities
Bonds Financing
In Chapter 13, we learned about one way that companies can get capital/money to grow
their business. Issuing or getting a bond is another vehicle that a company can use to
get money.
While stocks, reduce the ownership interest – bonds do not BUT they increase debt or
liabilities. Bonds have interest that needs to be paid but is tax deductible.
Advantages of Bonds
• Bondholders have no equity in the company
• Interest on bonds is tax deductible
• Bonds can increase return on equity – financial leverage
Disadvantages of Bonds
• Bonds can decrease return on equity
• Bonds require payment of principal borrowed and interest
, Overview of Bonds
Bond Par Value = the “face value” amount of bond
Bond Issue Date = the date that a company sells a bond to the public.
Maturity Date = the date that bond par value is going to be paid
Contract Interest Rate = the interest on the bond
Types of Bonds
• Par Value – Contract rate/interest rate = market rate
• Discounted – Contract rate/interest rate < market rate
• Premium – Contract rate/interest rate > market rate
Watch Video – Bonds at Par, Discount and Premium
Purchasing Bonds
Bonds can be purchased on Wall Street. The amount that a bond is priced at on the
market is shown as a % of their par value.
Example: A bond with par value of $100.00/share priced at $105.00 has a market
value/price of = price/par value or $105.00/$100.00 = 105.00%
