Chapt. 16 LT Debt1 Long-term Liabilities: BONDS see “Confederation Bridge…”p. 734 of text Text pages734  757 (no amortization) DO:P.766+ Questions; BE16-1,2,3; E16-1,2; P16-4A

Chapt. 16 LT Debt2 What are bonds? p.736 Bonds are a form of interest-bearing notes issued by corporations, governments, and governmental agencies. Bonds, like common shares, can be sold in small denominations (usually a thousand dollars), and as a result they attract investors. Often secured against assets; if unsecured  debentures priority claim on assets is case of bankruptcy No ASSET as Collateral

Chapt. 16 LT Debt3 Financing the Growth of a Company EQUITY  selling (issuing) more shares of a company  Loss of control / dilution of ownership of the company  Lower potential EPS DEBT  Borrow large sums of money required to finance (pay for) big projects  Long-term capital to match the future revenues generated from the acquisition

Chapt. 16 LT Debt4 BONDS: Pros & Cons p.737  Maintain ownership  Interest is tax deductible (p. 737 ill.16-2)  Lower ROI to creditors than equity  Interest Payments = “servicing the debt”  Redeem = principal paid back at maturity

Chapt. 16 LT Debt5 TYPES OF BONDS p.738 Bonds that mature at a single specified future date are called term bonds. In contrast, bonds that mature in installments are called serial bonds

Chapt. 16 LT Debt6 TYPES OF BONDS p.738 Registered bonds are issued in thename of the owner and have interest payments made by cheque to bondholders of record. Bearer or coupon bonds are not registered; thus bondholders must send in coupons to receive interest payments.

Chapt. 16 LT Debt7 TYPES OF BONDS p.738 Convertible bonds permit bondholders to convert the bonds into common shares at their option. Redeemable (callable) bonds are subject to call and retirement at a stated dollar amount prior to maturity at the option of the issuer. Retractable bonds are subject to redemption prior to maturity at the option of the holder.

Chapt. 16 LT Debt8 Bond (NOT James) Bond p Issuing Company (borrower) Interest Rate % (Coupon rate per year  paid semi-annually) When principal is repaid - TIME Current trading price cents/$ Effective current ROI Market Value  discount / premium; Debt “Rating”; CompanyCouponMaturityPriceYield Loblaws6.65%Nov8/ %

Chapt. 16 LT Debt9 “what is it worth”?  Market Value  discount / premium  Debt “Rating”  The market value of a bond is equal to the present value of all the future cash payments promised by the bond.

Chapt. 16 LT Debt10 INTEREST RATES AND BOND PRICES, Ill. 16-7, p % 5% 6% Premium Face Value Discount Bond Contractual Interest Rate 5% Issued when Market Interest Bonds Sell Rates at

Chapt. 16 LT Debt11 Example: Nortel has listed in their AR 200 million 6.88% note (i.e. debt or bonds) due Sept 1, Issued Sept 1998 at par, semi annual interest Issue date:Cash 200,000,000 Bonds payable200,000,000 Sept 1, ‘03Bond Interest Expense6,880,000 Cash6,880,000 Dec 31 ‘03Bond interest expense4,590,000 Accrued interest expense payable 4,590,000 March 1 ‘04Bond interest expense2,290,000 Bond interest payable4,590,000 Cash 6,880,000 Sept 1 ’23Bond payable 200,000,000 Cash 200,000,000