Financing Part I: Debt
Chapter 14 in Spiceland
See example excel files examples
File names: Bonds and Leases
Topics:
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Liabilities
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Notes
Bonds
Leases
Current portion of non-current liabilities
Non-current liabilities expected to be
refinanced
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Non Current Liabilities:
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Notes ( longer than one year)
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Mortgage notes
Car loan
Bonds
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Bonds:
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Types
Terms
Issuance
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Calculation of price
Rules
Interest determination
Retirement
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Bonds (Types):
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Bearer Bonds - Registered bonds
Callable bonds
Convertible bonds
Coupon bonds - Zero coupon bonds
Debenture bonds
Mortgage bonds
Serial bonds
Junk bonds – Deep discount bonds
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Bonds (Terms):
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Indenture document – bond covenant
Underwriters
Face value - Maturity value
Coupon rate
Discount rate - yield rate – effective rate
Issue price
Premium - discount
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Bonds: Issue Price:
1.
2.
3.
4.
5.
6.
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)
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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
Dr. Cash
$113,591
$113,591
cr. Bonds payable
Cr. Premium
$100,000
$ 13,591
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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 =
Issue Price
57,350
$ 88,530
Dr. Cash
$ 88,530
Dr. discount
$ 11,470
cr. Bonds payable
$100,000
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Amortization of Premium
Carrying
value
(CV)
113,591
Interest
rate
Interest
expense
Interest
paid
Reduction in
CV
.04
4.544
5000
(456)
113,134
112,660
.04
.04
4.525
4.506
5000
5000
(475)
(513)
100,962
100,000
.04
4,038
5000
(962)
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Amortization of Discount
Carrying
value
(CV)
88,530
Interest
rate
Interest
expense
Interest
paid
Reduction in
CV
.06
5,312
5000
312
88,841
.06
5,330
5000
330
89,172
.06
5,350
5000
350
99,057
100,000
.06
5,943
5000
943
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Retirement at Maturity
Final interest payment:
 Dr. Interest expense
$5,943

Cr. Discount
$
943
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Cr. Cash
$ 5,000
 Payment of Maturity Value:
 Dr. Bond payable
$100,000

Cr. Cash
$100,000
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Repurchase After 5 Years
Bond market value: $ 97,000, carrying value: $92,112 )
(cash includes $5,000 for interest payment)
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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
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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)
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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
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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
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Cr. Cash
$
5,000
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Cr. Common Stock
$ 93,166
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Early Retirement:
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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
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Current Portion of Long Term
Debt
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
Needs to be reclassified from noncurrent to current – However:
If company has both the intent and the
ability to refinance
then
separate category between current and
non-current
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