ACC 311 Lecture Notes - Lecture 10: Contract, Amortizing Loan, Interest Expense

• School: UT-Austin
• Department: Accounting
• Course: ACC 311
• Professor: Gretchen Charrier

Document Summary

Issuing bonds can increase return to shareholders. Organizations can borrow funds at a specified interest rate then invest the funds at a higher interest rate. Risk of bankruptcy: interest must be paid whether corporation earns income or incurs loss. Negative impact on cash flows: must generate sufficient cash to repay debt. Callable bonds: bonds that may be called for early retirement at the option of the issuer. Indenture: a legal document that describes all the details of a debt security to potential buyers. Prospectus: a regulatory filing that describes all the details of a debt or equity security to potential buyers. Covenant: a legally binding agreement between a bond issuer and a bondholder. Sales price of bond = present value of principal + present value of interest payments. Effective-interest amortization: interest expense = bond carrying value * market rate. Deep discount bonds: zero coupon bonds do not pay periodic interest. Pv of principal = issue price of bonds.