What are the characteristics of the $2 billion in bonds that Tesla Motors is issuing?

Tesla Motors, Inc., is an American company that designs, manufactures, and sells electric cars and components. It is

Source: http://www.digitaltrends.com/wp-content/uploads/2013/08/Tesla-Model-S-burgondy.jpg

publicly traded on the NASDAQ under the symbol TSLA.  Tesla has plans to build a $4 to $5 billion battery production plant beginning in 2017. To help to pay for the new manufacturing facility, Tesla is issuing $2 billion of bonds.  The $2 billion in bonds is actually two different instruments:

1. $800 million of five-year notes with a coupon payment rate of 0.25%
2. $1.2 billion of seven-year notes with a coupon payment rate of 1.25%

Both types of bonds have an equity conversion feature, which means investors could convert these bonds into stock at some future date depending on certain events.

Tesla issued bonds in 2013 as well.

Questions

1. Is Tesla issuing bonds/notes receivable or bonds/notes payable?  How do you know?
2. Will the $2 billion of bonds appear on the balance sheet or the income statement for Tesla? In what section?
3. Will Tesla pay or will it receive interest on these bonds?
4. How much annual interest will Tesla pay on the five-year notes?
5. How much annual interest will Tesla pay on the seven-year notes?
6. Why would the coupon (interest) rate on the seven-year notes be greater than the coupon rate on the five-year notes?
7. The equity conversion feature allows Tesla to issue these bonds at much lower coupon rates than if the bonds were not convertible.  Why are investors willing to take less interest on these bonds than on a non-convertible bond?

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below.  Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions.  The YouTube video link below is a narration of the blog post article (no discussion questions are included in the YouTube video; those can be assigned separately.)

• Student handout (pdf) (word) (contains entire blog posting + discussion questions)
• PowerPoint file (brief article overview + discussion questions)
• YouTube video (narrated article in shareable YouTube link)

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