1. CHAPTER 15 BONDS, LEASES AND MORTGAGES PAYABLE
HFT 2403
CHAPTER 15
BONDS, LEASES AND MORTGAGES PAYABLE

2. BONDS PAYABLE Long term liabilities over one year
Holders of the bonds are creditors, not owners
Bond holders receive interest for their investment

3. SALE OF BONDS Underwriting Premium – above face value
Resellers
Premium – above face value
Discount – below face value
Saleable in secondary markets
Normally sold at face value of $1,000
Bond indenture
Contractual provisions of the bond

4. Advantages and Disadvantage of Bond Financing
Fixed rate
Less risk to bondholders
Bondholders have no control in business operation
Tax advantages
Disadvantages
Interest must be paid
Maturity date
Fixed charge

5. Classification of Bonds
Term bonds
Paid in one lump sum
Sinking fund
Serial bonds
Paid off in installments
Mortgage bonds
Specific collateral
Debenture bonds
Pledged by the assets of the company
Registered bonds
Bondholder is registered owner
Coupon bonds
Also called bearer bonds

6. Discounts and Premiums
Contra-liability account
Discount represents additional interest expense
Amortized over the life of the bond
Premium
Added to bonds payable balance
Reduction of interest expense

7. Convertible Bonds Can be converted to stock at a fixed price
The best of both worlds
Company – lower interest rate
Bondholder
Security of a fixed investment
Potential of ownership
Conversion parity price

8. Leases Operating leases Capital leases Lessor (owner) Lessee (renter)
Right to use without the potential of ownership
Capital leases
Potential for ownership
Allows for transferability of ownership at some point in time
Bargain purchase option in the lease
Life of the lease is greater than 75% of the economic life of the asset
The present value of the minimum lease payments equals 90% or more of the property’s market value

9. Pensions Defined Contribution Defined Benefits
Employers and employees contribute fixed amounts
Benefits are based on accumulated values
Defined Benefits
Based on an estimated future amount

10. Mortgages Payable Loan collateralized by fixed property Building Land
Payment is usually principal and interest
Long term liability

11. Questions?