Long Term Debt (Chapter 14)

Bond Valuation
 Types of Bonds
• SECURED AND UNSECURED BONDS. Secured bonds are backed by a pledge of some sort of collateral.
Mortgage bonds are secured by a claim on real estate. Collateral trust bonds are secured by stocks and bonds
of other corporations. Bonds not backed by collateral are unsecured.

• A debenture bond is unsecured.

• A “junk bond” is unsecured and also very risky, and therefore pays a high interest rate. Companies often use
these bonds to finance leveraged buyouts.

• TERM, SERIAL BONDS, AND CALLABLE BONDS.

• Bond issues that mature on a single date are called term bonds; issues that mature in installments are called
serial bonds. Serially maturing bonds are frequently used by school or sanitary districts, municipalities, or
other local taxing bodies that receive money through a special levy.

• Callable bonds give the issuer the right to call and retire the bonds prior to maturity.

• CONVERTIBLE, COMMODITY-BACKED, AND DEEP-DISCOUNT BONDS.

• If bonds are convertible into other securities of the corporation for a specified time after issuance,
• they are convertible bonds.
 Types of Bonds..continued
• Two types of bonds have been developed in an attempt to attract capital in a tight
• money market—commodity-backed bonds and deep-discount bonds.
• Commodity-backed bonds (also called asset-linked bonds) are redeemable in measures of a commodity, such as
barrels of oil, tons of coal, or ounces of rare metal. To illustrate, Sunshine Mining, a
• silver-mining company, sold two issues of bonds redeemable with either $1,000 in cash or 50 ounces of silver,
whichever is greater at maturity, and that have a stated interest rate of 8½ percent. The accounting problem is
one of projecting the maturity value, especially since silver has fluctuated between $4 and $40 an ounce since
issuance.

• JCPenney Company sold the first publicly marketed long-term debt securities in the United States that do not
bear interest.

• These deep-discount bonds, also referred to as zero interest debenture bonds, are sold at a discount that
provides the buyer’s total interest payoff at maturity.

• REGISTERED AND BEARER (COUPON) BONDS. Bonds issued in the name of the owner are: Registered bonds and
require surrender of the certificate and issuance of a new certificate to complete a sale.

• A bearer or coupon bond, however, is not recorded in the name of the owner and may be transferred from one
owner to another by mere delivery.
Effect
Effect of
of interest
interest Rate
Rate on
on Selling
Selling Price
Price (Ref:
(Ref:Pearson
Pearson14-13)
14-13)

Assume Stated Rate of 8%

Market Interest Bonds Sold At

6% Premium

8% Par Value

10% Discount

LO 3
How to Value & Amortize a Bond
Example 1: Bond Sold at Discount (Ref: Pearson-Slide 27-28)
Using P.V. Tables – for a Lump Sum
Amortization of Bond Discount
Making the Journal Entries
How to Value & Amortize a Bond
Example 1: Bond Sold at Premium (Ref: Pearson-Slide 32-34)
Amortization of Bond Premium
Making the Journal Entries