Lesson: 60

Topic: The Characteristics of Debt Financing

Objectives:

Students will examine the characteristics of various forms of debt financing, including:

• bonds,
• notes payable,
• loans.

Bond basics will be examined as well. Thus, students will come to understand the significance of the following bond-related concepts:

• face value
• contractual interest rate
• bond indenture (contract)
• bond certificate
• authorizing a bond issue (board of directors)
• bond issue
• bond investment company (ex. TD Waterhouse)
• underwriting a bond issue

In addition, students will come to understand the advantages and disadvantages associated with bond (debt) financing as opposed to stock (equity) financing, including:

• bond advantages to bond issuer:
  • shareholder control is not effected;
  • bond interest paid is tax-deductible (whereas dividends are not);
  • earnings per share will likely be higher if funds are raised from distribution of bonds as opposed to issuing shares
• bond disadvantages to bond issuer:
  • interest payments must be made at the scheduled periodic basis
  • principal (face value) must be paid back at maturity

Finally, students will come to differentiate between various forms of bonds, including:

• secured and unsecured,
• term and serial,
• registered and bearer,
• convertible,
• redeemable and retractable.

Method of Instruction and Evaluation Exercise:

Presentation:

After a Socratic lesson guided by the PowerPoint entitled Long-Term Liabilities, students will break into five groups in order to complete a presentation on five types of bonds:

Expectations Addressed:

The expectations addressed by this lesson have been highlighted below.

Strand 4: Financial Analysis and Decision Making

Methods of Financing

By the end of this course, students will:

– explain the characteristics of debt financing (e.g., bonds, notes payable, loans) and equity financing (e.g., sale of common or preferred shares) as methods of financing;
– compare the advantages and disadvantages of debt financing and equity financing;
– describe alternative sources of funding available to businesses (e.g., venture capital, government loans and grants).

References:

• Text, chapter #16, pages 736-740.