Acct 111 - Chapter 15

Question 1

AMORTIZED COST

Answer 1

The face value (principal amount) of the bonds less any unamortized discount or plus any unamortized premium.

Question 2

AMORTIZING THE DISCOUNT

Answer 2

The allocation of the bond discount to interest expense of the life of the bonds.

Question 3

AMORTIZING THE PREMIUM

Answer 3

The allocation of the bond premium to interest expense over the life of the bonds.

Question 4

BOND

Answer 4

A debt security that is traded on an organized securities exchange, is issued to investors, and has these properties: the principal amount will be repaid at a designated maturity date and periodic interest is paid (normally semi-annually) at a specified rate on the principal amount.

Question 5

BOND CERTIFICATE

Answer 5

A legal document indicating the name of the issuer, the face value of the bond, and other data such as the contractual interest rate and maturity date of the bond.

Question 6

CONTRACTUAL INTEREST RATE

Answer 6

The rate that determines the amount of interest the borrower pays and the investor receives. Also known as coupon interest rate and stated interest rate.

Question 7

COUPON INTEREST RATE

Answer 7

The rate that determines the amount of interest the borrower pays and the investor receives. Also known as contractual interest rate and stated interest rate.

Question 8

DEBT TO TOTAL ASSETS

Answer 8

The ratio of total liabilities to total assets. Indicates the proportion of assets that is financed by debt

Question 9

DISCOUNT (ON BONDS PAYABLE)

Answer 9

The difference that results when bonds’ selling price is less than their face value. This occurs when the market interest rate is greater than the contractual interest rate.

Question 10

EBIT (EARNINGS BEFORE INTEREST AND TAX)

Answer 10

Earnings before interest and tax, calculated as profit + interest expense + income tax expense.

Question 11

EFFECTIVE-INTEREST METHOD OF AMORTIZATION

Answer 11

A method of calculating interest expense and of amortizing a bond discount or bond premium that results in periodic interest expense equal to a constant percentage of the amortized cost of the bonds.

Question 12

FINANCIAL LEVERAGE

Answer 12

Borrowing at one rate and investing at a different rate.

Question 13

INSTALMENT NOTE

Answer 13

Normally a long term note that is payable in a series of periodic payments.

Question 14

INTEREST COVERAGE RATIO

Answer 14

A measure of a company’s ability to meet its interest obligations. It is calculated by dividing profit (earnings) before interest expense and income tax expense (EBIT) by interest expense.

Question 15

MARKET (EFFECTIVE) INTEREST RATE

Answer 15

The rate that investors require for lending money to a company.

Question 16

OFF-BALANCE SHEET FINANCING

Answer 16

The intentional effort by a company to structure its financing arrangements to avoid showing liabilities on its books.

Question 17

PREMIUM (ON BONDS PAYABLE)

Answer 17

The difference that results when bond’s selling price is greater than their face value. This occurs when the market interest rate is less than the contractual interest rate.

Question 18

REDEMPTION PRICE

Answer 18

An amount that a company pays to buy back bonds that is specified at the time the bonds are issued.

Question 19

SINKING FUND BONDS

Answer 19

Bonds secured by specific assets set aside to redeem (retire) the bonds.

Question 20

STATED INTEREST RATE

Answer 20

The rate that determines the amount of interest the borrower pays and the investor receives. Also known as contractual interest rate and coupon interest rate.