All bonds are ten year notes. Your company pays a 5% brokerage fee for issuing bonds. The first three digits of the bond, the series number, reflect the interest rate. The last four digits indicate the year in which the bond is due. The numbers are separated by the letter S which stands for “series.” For example, a bond with the number 12.6S2009 has an interest rate of 12.6% and is due December 31, 2009.

Bondholders will lend total amounts up to 80% of the value of your plant and equipment (the Production Department’s capacity and automation). Each bond issue pays a coupon, the annual interest payment, to investors. If the face amount or principal of bond 12.6S2009 were $1,000,000, then the holder of the bond would receive a payment of $126,000 every year for ten years. The holder would also receive the $1,000,000 principal at the end of the tenth year. Each year your company is given a credit rating that ranges from AAA (best) to D (worst). In Capstone®, ratings are evaluated by comparing current debt interest rates with the prime rate.

As a general rule, bond issues are used to fund long term investments in capacity and automation. 

When issuing new bonds, the interest rate will be 1.4% over the current debt interest rates. If your current debt interest rate were 12.1%, then the bond rate would be 13.5%.

You can buy back outstanding bonds before their due date. A 1.5% brokerage fee applies. These bonds are repurchased at their market value or street price on January 1 of the current year. The street price is determined by the amount of interest the bond pays and your credit worthiness. It is therefore different from the face amount of the bond. If you buy back bonds with a street price that is less than its face amount, you make a gain on the sale. This will be reflected as a negative write-off on the income statement (see “Income Statement”).

Bonds are retired in the order they were issued, the oldest bonds retire first. There are no brokerage fees for bonds that are allowed to mature to their due date.

If a bond remains on December 31 of the year it becomes due, your banker borrows current debt to pay off the principal. This, in effect, converts the bond to current debt. This amount is combined with any other current debt due at the beginning of the next year.