Ch 10 Flashcards
Bond
Security or financial instrument that allows firms
To borrow money and repay loan over long
Period of time
Long term liability, 4 examples?
Obligation that will not be satisfied in one year
Or current operating cycle
Ex. Longterm bonds/ notes payable, leases, deferred taxes
Face value AKA Par value
Principal amount of bond that must be paid at maturity date
As stated on the bond certificate
Collateral
Assets that back bonds in case issuer can’t make interest
And principal payments, defaulting on the loan
Debenture bonds
Bonds backed by specific collateral
Serial bonds
Bonds that don’t all have same due date,
portion Of bonds comes due each time period
Callable bonds
Bonds that may be redeemed or retired before
Their specified due date
Face rate of interest AKA Stated rate, nominal rate, contract rate, coupon rate
Rate of interest paid each period specified on bond certificate
Market rate of interest AKA Effective rate, bond yield
Rate that investors could obtain by investing in other bonds
That are similar to issuing firms bonds
Rate is determined by bond market on basis of
Many transactions
Bond issue price
Present value of annuity of interest payments plus
Present value of principal
Premium
Excess of issue price over face value of bonds
Premium = issue price - face value
Discount
Excess of face value of bonds over issue price
Discount = face value - issue price
Interest rates and bonds relationship?
Inverse relationship, as interest rates increase
Bond prices decrease
Journal entries for issuance of bonds at discount? At premium?
Cash. 9366
Discount on Bonds Payable. 634
Bonds payable. 10000
Cash. 10693
Bonds payable. 10000
Premium on bonds payable. 693
