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Introduction to
Corporate Bonds
Legal Document
Publicly Traded Raise Capital
Let’s look at some terms.
Underwriters
Serial vs. Term
Face, Par, Principal
Secure vs. Unsecure
Callable vs. Convertible
Bond Indenture
Contract vs. MarketRate of Interest
Bond TermsBond Terms
WowLet’s get started
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
Bond
is a formal legal document
Bond Indenture
has a variety of features
needs proper wording, fine print and disclosures
Serial vs. Term
Serial BondsA portion of the principal matures at regular intervals
Term BondsAll of the principal matures at once
Have a plan for paying the
principal
Have a plan for paying the
principal
Secure vs. Unsecure
SecureBacked by corporate assets
UnsecureBacked by the general credit of the corporation
Creditors – Pay attention!
Creditors – Pay attention!
Debenture Bonds
Face, Par, Principal
Interchangeable Terms Refer to the amount that must be repaid at maturity
Due at maturity
Interest Rates
Contract Rate•Stated on the bond•Determines cash due on interest payment dates
Market Rate•Market driven•Determines • Issue price • Interest expense
Stated Rate
Effective Rate
Remains constant
Fluctuates
Callable vs. Convertible
CallableCorporation canpay off debt early
ConvertibleBondholders can swap bonds for shares of corporate stock
Corporation decides
Bondholder decides
ABC CorporationABC Corporation
Issue Date Maturity Date
Interest Payment Dates
Principal Contract Interest Rate
Minimum Information
ABC CorporationABC Corporation
1/1/20X1 20 years
Interest Dates: 6/30 and 12/31
$500,000 8%PrincipalContract Interest Rate
Interest Payment Dates
MaturityIssue Date
Interest ComputationInterest 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
Journal EntriesJournal Entries
1/1/X1 – ABC Corp issues $500,000, 20 year, 8% bonds at par (100%)
Journal EntriesJournal Entries
6/30/X1 – ABC Corp pays interest
Journal EntriesJournal Entries
12/31/XX21 – ABC Corp pays the principal
Balance Sheet PresentationBalance Sheet Presentation
ABC CorporationBalance Sheet
12/31/X1
Long-term Liabilities
Bonds Payable $500,000
Advanced TopicsAdvanced Topics
Bond Discounts
Bond Premiums
Bond Retirements and Conversions
Bond Issue Price
Adjusting Entries