Review Current Liabilities and Long-Term Debt

More Marketable Securities & Long Term Debt RECITATION AGENDA MORE MARKETABLE SECURITIES & LONG-TERM DEBT • Questions on previous assignment • Marketable Securities • Long-Term Debt (Bonds) ¾ Terminology ¾ Balance Sheet Equation Effects ¾ Sample Problems • TA Questions More Marketable Securities & Long Term Debt Marketable Securities • Readily marketable – convertible to CASH on DEMAND Classified • Trading securities - Profit from short term price change - Current asset • Available-for-sale - Other trading securities - Current or non-current asset Recorded Purchase Price include • Direct costs • Incidental Acquisition costs More Marketable Securities & Long Term Debt Mark-to-market rule Readily marketable securities are to be carried at market price. Recording of gains and losses or price increase or decrease: Trading securities Available-for-sales Sales of securities IS – Realized gains/losses From sales (from beginning of period) IS - Realized gains/losses From sales (from acquisition) Price change – not sold yet IS – Unrealized/Holding gains/losses SE – Unrealized price increase/decrease More Marketable Securities & Long Term Debt LONG-TERM LIABILITIES – LONG-TERM DEBT Terminology y Par Value: stated or face value of the bond; the amount due at maturity y Coupon Rate: the rate used to determine the periodic cash payments, if any. (Also called the “Stated Rate” in the book.) This rate is stated as the annual amount. y Current Market Interest Rate: the rate used to determine the current market value of the bond (Price to purchase bond current). It is based on market conditions and risk characteristics of the borrower. This rate is stated as the annual amount. y Market Rate of interest at issuance: the rate used to determine proceeds received by the firm when the bond is issued. This rate is used to determine interest expense. (Also called the “Effective Rate” in the book.) y Book value of bond: Sometimes also called the “Net bond payable.” The book value of the bond is equal to the remaining promised payments (principal and coupon payments) discounted at the market rate of interest at issuance. y Coupon Payment: Cash Interest Payment = Par Value x Coupon Rate y Interest Expense: Interest Expense = book value of bond x Market Interest Rate at issuance y Zero-Coupon Bond: Bond with Coupon Rate of 0% More Marketable Securities & Long Term Debt Bonds - Par/Discount/Premium Bond Sells Market Rate at Issuance Proceeds Rec’d at Issue At Par = Coupon Rate = Par Value = Interest Expense At a Discount > Coupon Rate < Par Value < Interest Expense At a Premium < Coupon Rate > Par Value > Interest Expense Coupon Payment (Be sure you understand bonds sold at Par, and Zero-Coupon Bonds.) More Marketable Securities & Long Term Debt Long-Term Debt - Balance Sheet Equation If bond is sold At Par (Note: Market Value = Par Value, Coupon Payment = Interest Expense) Date Issue 6 mo. 1 yr. … Maturity Assets = Liabilities + S. E. Cash Bond Payable Premium (Discount) Retained Earnings Market Value Par Value (Coupon Payment) (Interest Expense) (Coupon Payment) (Interest Expense) (Par Value) (Par Value) If bond is Zero-Coupon (special case of bonds sold At Discount) Assets Cash Market Value = Liabilities + S. E. Bond Payable Premium (Discount) Retained Earnings Par Value (Discount)a Discount Accrualc (Interest Expense)b Discount Accrualc (Interest Expense)b Date Issue 6 mo. 1 yr. … Maturity (Par Value) (Par Value) a Discount = Par Value - Market Value b Interest Expense = Net Bond Payable x Market Rate of interest at issuance = (Par Value + Premium (Discount) Balance) x Market Rate of interest at issuance c Discount Accrual = Interest Expense (Only for Zero-Coupon Bonds)