Saturday, February 9, 2013

The Difference Between Mortgage Notes and Bonds

Mortgage Notes and Bonds

A mortgage Legal loan agreement that protects a lender by giving the lender the right to be paid from the cash proceeds from the sale of a borrower’s assets identified in the mortgage. is a legal agreement that helps protect a lender if a borrower fails to make required payments on notes or bonds. A mortgage gives the lender a right to be paid from the cash proceeds of the sale of a borrower’s assets identified in the mortgage. A legal document, called a mortgage contract, describes the mortgage terms.

Mortgage notes carry a mortgage contract pledging title to specific assets as security for the note. Mortgage notes are especially popular in the purchase of homes and the acquisition of plant assets. Less common mortgage bonds are backed by the issuer’s assets. Accounting for mortgage notes and bonds is similar to that for unsecured notes and bonds, except that the mortgage agreement must be disclosed. For example, TIBCO Software reports that its “mortgage note payable … is collateralized by the commercial real property acquired [corporate headquarters].”

Point: The Truth-in-Lending Act requires lenders to provide information about loan costs including finance charges and interest rate.

Global: Countries vary in the preference given to debtholders vs. stockholders when a company is in financial distress. Some countries such as Germany, France, and Japan give preference to stockholders over debtholders.

Example: Suppose the $60,000 installment loan has an 8% interest rate with eight equal annual payments. What is the annual payment Answer (using Table B.3): $60,000/5.7466 = $10,441

Decision Maker
Entrepreneur You are an electronics retailer planning a holiday sale on a custom stereo system that requires no payments for two years. At the end of two years, buyers must pay the full amount. The system’s suggested retail price is $4,100, but you are willing to sell it today for $3,000 cash. What is your holiday sale price if payment will not occur for two years and the market interest rate is 10%? 

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