1. LONG-TERM LIABILITIES 16 Financing expansion Smaller Amounts bank loan lease Larger Amounts stock issue bond issue

2. Bond Basics Advantages of bonds over stock  current stockholders retain control  tax savings  EPS increases if new expansion yields a good return Disadvantages of bonds over stock  cash is needed to pay bond interest and principal  higher risk  loan agreements might prohibit bonds

3. Bearer bonds Convertible bonds Secured bonds 2003 2004 2002 Serial bonds Bond Terminology

4. $1,000 REGISTERED Minnesota Manufacturing & Mining Corporation 8.5% Due July 1, 2013 Face value Contractual interest rate Maturity date Bond Certificate

5. $1,000 REGISTERED 8.0% Example: $1,000, 8% bond Annual interest = $80 Matures in 1 year 8% Market Interst Rate Market Price Principal and Interest in 1 year 100$1,000 $1,000 + 8%($1,000) = $1,080 10%98.2$982 $982 + 10%($982) = $1,080 6%101.9$1,019 $1,019 + 6%($1,019) = $1,080 Bond Trading

6. Accounting for Bonds  issuing bonds  redeeming bonds at maturity Make sure you know journal entries:

7. Other Long-Term Liabilities Cash Payment Interest Expense (10%) Reduction of Principal Balance 1/1/01$7,000 1/1/02$ 2,815$ 700 1/1/03 1/1/040

8. Cash Payment Interest Expense (10%) Reduction of Principal Balance 1/1/01$7,000 1/1/02$ 2,815$ 700$ 2,1154,885 1-1-02Made payment on note payable.