Ch. 14 Bond Terminology Flashcards
probable future sacrifices of economic benefit arising from present obligations that are no payable within a year or operating cycle of the company
Long-term Liabilities
Bonds issues that mature on a single date
Term Bond
issues that mature in installments, frequently used by school districts and other local taxing bodies that receive money through special levy
Serial Bonds
issues that give the issuer the right to call and redeem the bonds prior to maturity
Callable Bonds
bonds that can be converted into other securities of the corporation for a specified time after being issued
Convertible Bonds
bonds issued that are redeemable in measures of a commodity
Commodity-backed Bonds (asset-linked bonds)
bonds sold at a discount that provides the buyer’s total interest payoff at maturity
Deep-discount bonds or zero interest debenture bonds
bonds issued in the name of the owner, require surrender of the cerificate and issuance of a new certificate to complete a sale.
Registered Bonds
bond not recorded in the name of the owner and may be transferred from one owner to another by mere delivery.
Bearer Bond (coupon bond)
issues that pay no interest unless the issuing company is profitable
Income bonds
issues that the interest on them is paid form specified revenue sources, are most frequently issued by airports and governmental bodies.
Revenue bonds
How are bonds valued?
the present value of future cash flows; 1) PV of interest and 2) PV of principle
the interest rate written in the terms of the bond indenture is
the stated, coupon, or nominal rate.
if the bonds sell for less than face value they sell at
discount
if the bonds sell for more than face value they sell at
premium
the rate of interest actually earned by the bondholders
effective yield or market rate
amortization method at a constant amount each interest period
straight-line method
Amortization of a discount
increases interest expense
Amortization of a premium
decreases interest expense
If market interest rate is higher than the nominal interest rate, the bonds will sell at a
discount
if the market interest rate is lower than the nominal interest rate, the bonds will sell at a
premium
bonds issued at par on the interest date, when they are issued
accrue no interest, and the journal entry is a debit to cash and a credit to bonds payable
effective interest method
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
carrying value
is the same as book value
the replacement of an existing issuance with a new one is called
refunding
