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