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Second general rule
Second general rule
Long-term liabilities are reported at their present values.
Long-term liabilities are reported at their present values.
Present Value of a Long-term Liability = Present Value (Principal Payments + Interest Payments)
Bonds
Bonds
A bond is an obligation to repay a stated amount (variously referred to as the principal, par value, face amount, or maturity value) at a specified maturity date. A bond issue, in effect, breaks down a large debt into manageable parts, usually in $1,000 or $5,000 increments.
Bonds usually have 10 to 40 year terms.
Bonds pay interest (referred to as stated rate, coupon rate, or nominal rate) to bondholders.
Interest is usually paid semiannually.
Bond indenture
Bond indenture
A bond indenture describes the specific promises made to bondholders. Because it is impractical for the company to enter into direct agreements with every bondholder, the bond indenture is held by a trustee, such as a commercial bank.
A debenture bond is backed only by "full faith and credit" of the issuing company. No specific assets are pledged as collateral.
A mortgage bond is backed by a lien on specified real estate owned by the issuer.
A callable bond allows the issuing company to buy back, or call, outstanding bonds from bondholders before the scheduled maturity date. Most corporate bonds are callable.Â
Often calls are mandatory. These bonds are called sinking fund debentures.
Similarly, serial bonds provide a structured way to retire bonds with each bond having a unique maturity date.
Finally, convertible bonds allow the bondholder to convert a bond into shares of stock.
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