1. Planning Debt Financing
Chapter 14
Planning Debt Financing

2. Debt Financing Terms Maker of Note = borrower Holder of Note = lender
Face Value of Note =
what the borrower will ultimately pay the lender
Face Rate of Note =
cash interest the borrower will periodically pay the lender
Effective Interest Rate =
actual interest rate charged on the note
Proceeds of Note =
amount of cash raised from the issuance of the note.

3. What are the 3 Basic Types of Notes?
Periodic Payment Note
Installment note
Borrower receives the face value and makes periodic payments of principal and interest
PV = amount borrowed, FV = 0, r = annual rate of interest, c = number of payments per year, n = total number of payments, determine ANN = amount of each payment

4. Basic Notes Continued Lump-sum payment note Noninterest-bearing note
Borrower receives an amount less than the face value of the note and repays the face value of the note at some point in the future
PV = amount received, c = number of compounding periods per year, n = total number of compounding periods, r = annual rate of interest, ANN = 0, determine FV = face value of note

5. Basic Notes Continued Periodic and lump-sum payment note
Interest-bearing note
Borrower makes 2 promises:
(1) repay the face amount of the note at some point in the future and
(2) pay interest based on the face amount of the note and the face rate of interest periodically throughout the life of the note
Borrower receives more or less than the face value of note depending on the market rate of interest

6. Periodic and Lump-sum Payment Note Continued
FV = face value (amount repaid at end), ANN = interest paid periodically (face value * face rate * time), r = market rate of interest (annually), c = number of interest payments per year, n = total number of interest payments, determine PV = amount received

7. How do Notes Impact Budgeted Financial Statements?
Income statement
Interest expense (also tax expense—beyond the scope of this text)
Statement of cash flows
Cash paid periodically and at the end
Balance sheet
Carrying value of the note

8. Budgeted Financial Statements: Installment Notes
Income statement
Interest expense decreases over time because we are paying principal and interest with every payment, therefore, the principal on which interest is based decreases over time
Statement of cash flows
Payment of principal and interest is constant over time
Balance sheet
Carrying value of the note decreases over time because we are making principal payments over the life of the note

9. Budgeted Financial Statements: Noninterest-bearing Notes
Income statement
Interest expense increases over time because interest accrues but is not paid over the life of the note (carrying value increases)
Statement of cash flows
No periodic payment made
Balance sheet
Carrying value of the note increases over time as the interest incurred, but not paid, is added to the carrying value of the note

10. Budgeted Financial Statements: Interest-bearing Notes (Market Rate greater than Face Rate)
Income statement
Interest expense increases over time because we are making payments based on the face rate of interest when the market rate of interest is higher, therefore, the additional interest accrues over the life of the note
Statement of cash flows
Cash payment of interest is constant over time
Balance sheet
The carrying value of the note increases over time as the interest accrued, but not paid, is added to the carrying value

11. Budgeted Financial Statements: Interest-bearing Notes (Market Rate less than Face Rate)
Income statement
Interest expense decreases over time because we are making payments based on the face rate of interest when the market rate of interest is lower, therefore, the reduction in interest accrues over the life of the note
Statement of cash flows
Cash payment of interest is constant over time
Balance sheet
The carrying value of the note decreases over time as the reduction in interest is subtracted from the carrying value

12. What are the Most Common Sources of Debt Financing?
Private financing
Borrowing from financial institutions
Leasing
Public financing
Issuing bonds

13. What are the Most Common Types of Bonds?
Registered
Callable
Convertible
Serial
Secured
Subordinated