Page 627 - Accounting Principles (A Business Perspective)

15. Long-term financing: Bonds

Answer the following questions:
a. If you held one USD 1,000 bond, how many shares of stock would you receive if you converted the bond into
shares of stock? (Hint: You can use the principal amount of the bond to buy shares of stock at the stated price.)

b. Assume you held one USD 1,000 bond and the bond was called by the company at a price of 105 per cent of
the face amount. If the current market price per share of the stock was USD 29, would you convert the bond into
shares of stock or would you surrender the bond? Explain.
Ethics case – Writing experience F Refer to "An ethical perspective: Rawlings furniture company”. Write
out the answers to the following questions:
a. What motivates the brothers to pursue this new strategy?
b. Are the brothers the only ones assuming the risks?

c. How will workers, the city, the holders of the original bond issue, and the other present stockholders be
affected if the junk bonds are issued and are then defaulted?
d. How might these parties (stakeholders) be affected if a new buyer outbids the management?
e. What ethical considerations are involved?
Group project G In groups of two or three students, write a two-page, double-spaced paper on one of the
following topics:
The Use of Junk Bonds in the 1980s
Why Market Rates of Interest and Prices of Bonds Are Inversely Related
How a Company Can Force Conversion of Callable, Convertible Bonds

How Bond Sinking Funds Work
Do some library research on your topic and properly cite your sources. Make your analysis convincing. Your
paper should be neat, contain no spelling or grammatical errors, and be the result of several drafts. Use a word
processing program to prepare your paper if possible. Your paper should have a cover page with the title and the
authors' names.
Group project H In a small group of students, locate Accounting Principles Board Opinion No. 21 (from a
faculty member or from the library) relating to the amortization of premiums and discounts on bonds. Investigate

why the Board recommended the effective interest rate method over the straight-line method for amortizing bond
premiums and discounts. Which method do you favor and why? Summarize the highlights of the APB Opinion and
your own opinions in a written report to your instructor.
Group project I With one or two other students, locate the annual reports of three companies with bonds
outstanding as part of their long-term debt. You should read the notes to the financial statements to determine the
composition of the long-term debt. Identify the bonds (e.g. debentures, serial), their interest rates, and any other
information pertaining to them. Compare the bonds outstanding for the three companies. Write a report to your
instructor summarizing your findings.

Using the Internet—A view of the real world
Visit the following site for the Eastman Kodak Company:
http://www.kodak.com
By following the instructions on the screen, locate the notes to the financial statements and find the one
pertaining to long-term debt. In your own words, write a short report to your instructor summarizing the types of

long-term debt held by the company and some of the details of the arrangements with lenders.

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