1. Chapter 10 Long-Term Debt

2. Characteristics of LT Debt Usually have to make payments as we go Some have balloon payments Interest can be fixed or variable Need amortization schedules to break down payments between interest and principal

3. Amortization Schedule $10,000 loan, 5% annual interest rate, issued 1/1/04 Three annual payments of $3,672.09. Year Principle RemainingPaymentInterest Portion Principal Portion 2004 10,000.00 3,672.09 500.00 3,172.09 2005 6,827.91 3,672.09 341.40 3,330.69 2006 3,497.22 3,672.09 174.86 3,497.23 $ 11,016.27 $ 1,016.26 $ 10,000.01

4. What is Collateral Pledge an asset to secure a loan The asset pledged is collateral Example: Bank retains title of your car until loan is paid in full. Same is done with home mortgages.

5. Restrictive Covenants Lender may put conditions on borrower. Examples: –Require money to be saved into a sinking fund to make future debt payments –Cannot borrow additional funds –Must meet certain levels of sales, etc… If conditions are not met the lender can demand repayment.

6. Lines of Credit Flexible source of borrowed funds. Often used to get through slow seasons. DateBorrowed/ (Repaid) Interest @ 5% AnnuallyBalance 1/1/2005 2,000.00 1/31/2005 8.33 2,008.33 2/1/2005 3,000.00 5,008.33 2/28/2005 20.87 5,029.20 3/1/2005 (3,000.00) 2,029.20 3/31/2005 8.46 2,037.66

7. What are Bonds? A long-term note a company issues in return for cash Meets long-term financing needs Think of school bonds

8. Bond Configurations Often interest is paid throughout loan –But not always Principal can be paid: –Specified intervals – Term Bonds –At the end – Serial Bonds

9. More Bond Terms Face Value: what will be paid back at the end of the loan Stated Interest Rate: rate of interest paid on face value Discount: % less than face value bond is purchased for Premiun: % greater than face value bond is purchased for Sinking Fund: Money set aside to pay back bond

10. Bond Example $10,000 face value bond 5% stated interest rate Interest paid annually Repaid after two years