Page 594 - Accounting Principles (A Business Perspective)

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• Most bonds require stated periodic interest payments by the company. In contrast, dividends to
stockholders are payable only when declared; even preferred dividends need not be paid in a particular period
if the board of directors so decides.

• Bond interest is deductible by the issuer in computing both net income and taxable income, while dividends
are not deductible in either computation.
Selling (issuing) bonds

A company seeking to borrow millions of dollars generally is not able to borrow from a single lender. By selling
(issuing) bonds to the public, the company secures the necessary funds.
Usually companies sell their bond issues through an investment company or a banker called an underwriter.
The underwriter performs many tasks for the bond issuer, such as advertising, selling, and delivering the bonds to
the purchasers. Often the underwriter guarantees the issuer a fixed price for the bonds, expecting to earn a profit by
selling the bonds for more than the fixed price.
When a company sells bonds to the public, many purchasers buy the bonds. Rather than deal with each

purchaser individually, the issuing company appoints a trustee to represent the bondholders. The trustee usually
is a bank or trust company. The main duty of the trustee is to see that the borrower fulfills the provisions of the
bond indenture. A bond indenture is the contract or loan agreement under which the bonds are issued. The
indenture deals with matters such as the interest rate, maturity date and maturity amount, possible restrictions on
dividends, repayment plans, and other provisions relating to the debt. An issuing company that does not adhere to
the bond indenture provisions is in default. Then, the trustee takes action to force the issuer to comply with the
indenture.

Bonds may differ in some respects; they may be secured or unsecured bonds, registered or unregistered (bearer)
bonds, and term or serial bonds. We discuss these differences next.
Certain bond features are matters of legal necessity, such as how a company pays interest and transfers
ownership. Such features usually do not affect the issue price of the bonds. Other features, such as convertibility
into common stock, are sweeteners designed to make the bonds more attractive to potential purchasers. These
sweeteners may increase the issue price of a bond.
Secured bonds A secured bond is a bond for which a company has pledged specific property to ensure its
payment. Mortgage bonds are the most common secured bonds. A mortgage is a legal claim (lien) on specific
property that gives the bondholder the right to possess the pledged property if the company fails to make required

payments.
Unsecured bonds An unsecured bond is a debenture bond, or simply a debenture. A debenture is an
unsecured bond backed only by the general creditworthiness of the issuer, not by a lien on any specific property. A
financially sound company can issue debentures more easily than a company experiencing financial difficulty.
Registered bonds A registered bond is a bond with the owner's name on the bond certificate and in the
register of bond owners kept by the bond issuer or its agent, the registrar. Bonds may be registered as to principal
(or face value of the bond) or as to both principal and interest. Most bonds in our economy are registered as to

principal only. For a bond registered as to both principal and interest, the issuer pays the bond interest by check. To
transfer ownership of registered bonds, the owner endorses the bond and registers it in the new owner's name.
Therefore, owners can easily replace lost or stolen registered bonds.

Accounting Principles: A Business Perspective 595 A Global Text