Stockholders' Equity: Classes of Capital Stock

Read this chapter, which introduces long-term bonds, their value, how they compare with stock. Some companies expand using stock, while some use debt (bonds). The example exercises refer to Appendix A, which is included here.

Bonds payable

A bond is a long-term debt, or liability, owed by its issuer. Physical evidence of the debt lies in a negotiable bond certificate. In contrast to long-term notes, which usually mature in 10 years or less, bond maturities often run for 20 years or more.

Generally, a bond issue consists of a large number of USD 1,000 bonds rather than one large bond. For example, a company seeking to borrow USD 100,000 would issue one hundred USD 1,000 bonds rather than one USD 100,000 bond. This practice enables investors with less cash to invest to purchase some of the bonds.

Bonds derive their value primarily from two promises made by the borrower to the lender or bondholder. The borrower promises to pay (1) the face value or principal amount of the bond on a specific maturity date in the future and (2) periodic interest at a specified rate on face value at stated dates, usually semiannually, until the maturity date.

Large companies often have numerous long-term notes and bond issues outstanding at any one time. The various issues generally have different stated interest rates and mature at different points in the future. Companies present this information in the footnotes to their financial statements. Exhibit 41 shows a portion of the long-term borrowings footnote from Dow Chemical Company's 2000 annual report. Promissory notes, debenture bonds, and foreign bonds are shown, with their amounts, maturity dates, and interest rates.

Promissory notes and debentures at 2000 December 31 Millions
6.95%, final maturity 2002 $ 346 $ ---
7.81%, final maturity 2002 ---
7.13%, final maturity 2003
7.00%, final maturity 2005 300 ---
7.70%, final maturity 2006 2,473 2,448
Subtotal $3,267 $3,135
Foreign bonds at 2000 December 31 Millions
4.63%, final maturity 2000, Swiss Fran $--- $ 95
6.38%, final maturity 2001, Japanese Yen 218 244
5.00%, final maturity 2003, Euro 139 151
Subtotal $357 $490

Exhibit 41: Dow chemical company's long-term notes and bonds (in millions)