Page 609 - Accounting Principles (A Business Perspective)

15. Long-term financing: Bonds

the 500 shares issued (500 shares X USD 10 par). The excess amount (USD 4,800) is credited to Paid-In Capital in
Excess of Par Value—Common.

An accounting perspective:

Business insight

The Securities and Exchange Commission took action to protect the public against abusive
telemarketing calls from sellers of municipal bonds. The residence of any person can only be called
between 8 am and 9 pm, without their prior consent. Callers must clearly disclose the purpose of
the call. Also, a centralized "Do-not-call" list of people who do not wish to receive solicitations must
be maintained and honored.
Source: "SEC Approves Rule Governing Calls From Muni-Bond Sellers to Investors," The Wall
Street Journal, Friday, December 27, 1996, p. A2.

The two leading bond rating services are Moody's Investors Service and Standard & Poor's Corporation. The

bonds are rated as to their riskiness. The ratings used by these services are:
Moody's Standard &
Poor's
Highest quality to upper medium Aaa AAA
Aa AA
A A
Medium to speculative Baa BBB
Ba BB
B B
Poor to lowest quality Caa CCC
Ca CC
C C
In default, value is questionable DDD
DD
D
Normally, Moody's rates junk bonds at Ba or below and Standard & Poor's at BB or below. As a company's
prospects change over time, the ratings of its outstanding bonds change because of the higher or lower probability
that the company can pay the interest and principal on the bonds when due. A severe recession may cause many

companies' bond ratings to decline.
Bond prices appear regularly in certain newspapers. For instance, The Wall Street Journal quoted IBM's bonds
as follows:
Issue Coupon Maturity Yield Price Change
IBM 7˚ 2013 6.6 113 -2
The bonds carry a coupon rate of 7° per cent. The bonds mature in 2013. The current price is USD 113 per
hundred, or USD 1,130.00 for a USD 1,000 bond. The price the preceding day was USD 115, since the change was
-2. The current price yields a return to investors of 6.6 per cent. As the market rate of interest changes from day to
day, the market price of the bonds varies inversely. Thus, if the market rate of interest increases, the market price of

bonds decreases, and vice versa.

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