Debt securities such as bonds pay a stated interest rate. This interest rate dep

Question

Debt securities such as bonds pay a stated interest rate. This interest rate depends on the risk of investment. In addition, bond prices change when investment risk changes. Standard and Poor’s provide ratings for companies. Stock prices also fluctuate. Fluctuations depend on various factors.

Find an article about a company that has been affected recently by its bond rating or its stock price. Relate the story to what we learned this week about accounting for bonds (liabilities) and stock (stockholders’ equity).

Please use this website as a source https://www.bloomberg.com/news/articles/2017-10-11/wal-mart-offers-bonds-to-retire-debt-as-amazon-battle-heats-up

The company I have chosen is Wal-Mart. Thank you

Explanation / Answer

When companies want to raise money, called capital, to expand their businesses or provide additional services, they may issue, or offer, stocks, bonds or both stocks and bonds for public sale. A stock offering invites investors to buy an ownership position in the company while a bond offering invites them to make a loan in exchange for the promise of repayment in full plus a certain rate of interest for the use of the money.

Bonds are debt investments. They represent a loan you make to an institution—a corporation, government or government agency—in exchange for interest payments during a specific term plus the repayment of your principal when the bond comes due. Because the income you receive from a bond is generally fixed at the time the bond is created, bonds are often called fixed-income investments.

Here are some concepts that are important to familiarize yourself with when considering a bond investment.

·         Par value or face value: the amount you’re lending and expect to be paid back, usually $1,000 per bond, but sometimes in multiples of $1,000.

·         Term: the length of time until the bond matures.

·         Maturity date: the date on which the principal is to be paid in full to you.

The interest rate is part of the contractual relationship you have with the borrower. It’s determined by a number of factors, including the bond’s term, current market rates and the creditworthiness of its issuer, which depends on the risk associated with the likelihood of the issuer’s repaying the bond. In general, longer-term bonds pay higher rates to reward you for committing your money for an extended period, but that’s not always the case. It’s also typical for a low-rated issuer to have to offer higher rates to attract interest in its bonds.

Bonds and Risk

Like other investments, when you invest in bonds and bond funds, you face investment the risk that you might lose money. In addition, the following risks, which can happen if the price falls and you sell for less than you paid. Just because you take investment risks doesn't mean you can't exert some control over what happens to the money you invest.

Bond prices change due to various factors. When the interest rates change bond prices change. If the interest rate increases, bond prices fall and if the interest rate decreases, bond prices increase.

Buying and Selling Bonds:

Investing in bonds can require a relatively large outlay of money. Although par value is usually $1,000, many bonds are not available individually and are sold only in lots of five or more. Agency bonds in particular may have a minimum investment of $10,000.

Because of this high initial investment, it’s more typical for institutions, such as mutual funds and pension funds, to own corporate and agency bonds than it is for individual investors. Some of the same issues exist with municipal bonds, but certain issuers may market to individuals in part to build community support for expensive projects.

Some of the world’s biggest companies have done similar transactions in anticipation of possible tax-law changes. By buying back bonds now that trade at prices above their maturity values, companies are essentially pre-paying interest, which they can deduct from their income while tax rates are still high.

Stockholders' equity is the portion of the balance sheet that represents the capital received from investors in exchange for stock (paid-in capital), donated capital and retained earnings. Stockholders' equity represents the equity stake currently held on the books by a firm's equity investors. It is calculated either as a firm's total assets minus its total liabilities or as share capital plus retained earnings minus treasury shares.

Stockholders' equity is often referred to as the book value of the company, and it comes from two main sources. The first and original source is the money that was originally invested in the company, along with any additional investments made thereafter. The second comes from retained earnings that the company is able to accumulate over time through its operations. In most cases, especially when dealing with older companies that have been in business for many years, the retained earnings portion is the largest component.

Paid-In Capital

Companies fund their asset purchases with equity capital, namely stockholders' equity, and borrowed capital from issuing debt and incurring other liabilities. The equity capital or stockholders' equity can also be viewed as a company's net assets — that is, total assets minus total liabilities, the amount of monetary interest that belong to the company's owners or stockholders. Investors originally and maybe later again contribute their share of capital as stockholders, and the capital so contributed is called paid-in capital, which is the basic source of total stockholders' equity. The amount of paid-in capital from each investor determines an investor's stockholder ownership percentage.

Retained Earnings

Retained earnings are a company's net income from operations and other business activities, available to stockholders and retained by the company as additional equity capital. Retained earnings are thus part of stockholders' equity. They are actually returns on total stockholders' equity but reinvested back to the company. Retained earnings are accumulated and grow larger over time as a company retains a portion of its earnings after dividends each year. At some point, the amount of accumulated retained earnings is to exceed the amount of equity capital contributed by stockholders and can eventually grow to be the main source of stockholders' equity.

Treasury Shares

Companies may return some capital out of its stockholders' equity back to stockholders from time to time when management is not able to deploy all the available equity capital in ways that can potentially deliver the best returns. This reverse capital exchange between a company and its stockholders is known as share buybacks. Shares bought back by companies become treasury shares, and their dollar value is noted in an account called treasury stock, a contra account to the accounts of paid-in capital and retained earnings. Treasury shares can be reissued back to stockholders for purchases when companies need to raise more capital.

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