What is the capital structure?
The mix of debt and equity
What are the two primary sources of external financing?
- Debt Financing
- Equity Financing
Define Debt Financing.
Borrowing money (Liabilities)
Define Equity Financing.
Obtaining additional investment from stockholders (Stockholders’ Equity)
What is a bond?
A bond is a certificate issued to raise cash.
Who is the issuer of a bond?
The borrower or seller of the bond
Who are the bondholders?
The buyers of the bond
What is the most common form of corporate debt?
Bonds
What are the two parts of a corporate bond?
- Obligation to pay the principal or face value at maturity
- Cash interest payments usually 2 times a year
What is the face value of a bond?
The stated amount on the bond contract to be paid back at maturity
What is the stated (coupon) rate of a bond?
The rate quoted in the bond contract, used to calculate cash payments for interest
What is the market rate of a bond?
The true interest rate available today for that type of bond
What does it mean if a bond is issued at face value?
The bond is issued at its face value and repaid at the same amount
What does it mean if a bond is issued at a discount?
The bond is issued for less than its face value
What does it mean if a bond is issued at a premium?
The bond is issued for more than its face value
What is the purpose of discounts and premiums in bond issuance?
To adjust the bond’s attractiveness based on the stated rate compared to the market rate
How is the issue price of a bond determined?
Present Value of the face amount + Present Value of the periodic interest payments
What happens if a bond’s stated interest rate is lower than the market rate?
The bond will be issued at a discount
What is true interest expense?
Carrying value x market rate
What are the components of an amortization schedule for bonds issued at a discount?
- Interest Expense
- Discount on Bonds Payable
- Cash Paid
What is the formula for calculating true interest expense?
i = p x r x t
What is the carrying value of a bond at maturity?
The face value that is due
What is an installment note?
A loan where the same installment is paid each month, covering both interest and principal
How is the debt-to-equity ratio calculated?
Total Liabilities / Total Stockholders’ Equity
