Ch. 14 Bond Terminology

Question 1

probable future sacrifices of economic benefit arising from present obligations that are no payable within a year or operating cycle of the company

Answer 1

Long-term Liabilities

Question 2

Bonds issues that mature on a single date

Answer 2

Term Bond

Question 3

issues that mature in installments, frequently used by school districts and other local taxing bodies that receive money through special levy

Answer 3

Serial Bonds

Question 4

issues that give the issuer the right to call and redeem the bonds prior to maturity

Answer 4

Callable Bonds

Question 5

bonds that can be converted into other securities of the corporation for a specified time after being issued

Answer 5

Convertible Bonds

Question 6

bonds issued that are redeemable in measures of a commodity

Answer 6

Commodity-backed Bonds (asset-linked bonds)

Question 7

bonds sold at a discount that provides the buyer’s total interest payoff at maturity

Answer 7

Deep-discount bonds or zero interest debenture bonds

Question 8

bonds issued in the name of the owner, require surrender of the cerificate and issuance of a new certificate to complete a sale.

Answer 8

Registered Bonds

Question 9

bond not recorded in the name of the owner and may be transferred from one owner to another by mere delivery.

Answer 9

Bearer Bond (coupon bond)

Question 10

issues that pay no interest unless the issuing company is profitable

Answer 10

Income bonds

Question 11

issues that the interest on them is paid form specified revenue sources, are most frequently issued by airports and governmental bodies.

Answer 11

Revenue bonds

Question 12

How are bonds valued?

Answer 12

the present value of future cash flows; 1) PV of interest and 2) PV of principle

Question 13

the interest rate written in the terms of the bond indenture is

Answer 13

the stated, coupon, or nominal rate.

Question 14

if the bonds sell for less than face value they sell at

Answer 14

discount

Question 15

if the bonds sell for more than face value they sell at

Answer 15

premium

Question 16

the rate of interest actually earned by the bondholders

Answer 16

effective yield or market rate

Question 17

amortization method at a constant amount each interest period

Answer 17

straight-line method

Question 18

Amortization of a discount

Answer 18

increases interest expense

Question 19

Amortization of a premium

Answer 19

decreases interest expense

Question 20

If market interest rate is higher than the nominal interest rate, the bonds will sell at a

Answer 20

discount

Question 21

if the market interest rate is lower than the nominal interest rate, the bonds will sell at a

Answer 21

premium

Question 22

bonds issued at par on the interest date, when they are issued

Answer 22

accrue no interest, and the journal entry is a debit to cash and a credit to bonds payable

Question 23

effective interest method

Answer 23

step 1: compute bond interest by multiplying the carrying value at the beginning of the period by the effective interest expense
step 2: determine bond discount or premium amortization by comparing interest expense with interest (cash) to be paid

Question 24

carrying value

Answer 24

is the same as book value

Question 25

the replacement of an existing issuance with a new one is called

Answer 25

refunding