MGT 11A Chapter 10: CHAPTER 10 - pt 1
Document Summary
Projects that need a lot of money often are financed with bonds. Bond: issuer"s written promise to pay the par value of the bond (face value) with interest. Paid at the stated future date (maturity date) Most bonds require the issuer to make semiannual interest payments. Interest computed by multiplying the par value by the bond"s contract rate. 1) bonds do not affect owner control. 2) interest on bonds is tax deductible. 3) bonds can increase return on equity. Company that earns a higher return with borrowed funds than it pays in interest on those funds increases its return on equity: financial leverage. 1) bonds can decrease return on equity. When a company earns a lower return with the borrowed funds than it says in interest, it decreases return on equity. More likely when a company has low income or losses. 2) bonds require payment of both periodic interest and the par value at maturity.
