Chapter 10 Flashcards
Series of equal payments at equal intervals.
ANNUITY
Bonds made payable to whoever holds them (the bearer); also called UNREGISTERED BONDS.
BEARER BONDS
Written promise to pay the bond’s par (or face) value and interest at a stated contract rate; often issued in denominations of $1,000.
BOND
Document containing bond specifics such as issuer’s name, bond par value, contract interest rate, and maturity date.
BOND CERTIFICATE
Contract between the bond issuer and the bondholders; identifies the parties’ rights and obligations.
BOND INDENTURE
Bonds that give the issuer the option to retire them at a stated amount prior to maturity.
CALLABLE BONDS
Long-term leases in which the lessor transfers substantially all risk and rewards of ownership to the lessee.
CAPITAL LEASES
Net amount at which bonds are reported on the balance sheet; equals the par value of the bonds less any unamortized discount or plus any unamortized premium; also called CARRYING AMOUNT or BOOK VALUE.
CARRYING (BOOK) VALUE OF BONDS
Interest rate specified in a bond indenture (or note); multiplied by the par value to determine the interest paid each period; also called COUPON RATE, STATE RATE, or NOMINAL RATE.
CONTRACT RATE
Bonds that bondholders can exchange for a set number of the issuer’s shares.
CONVERTIBLE BONDS
Bonds with interest coupons attached to their certificates; bondholders detach coupons when they mature and present them to a bank or broker for collection.
COUPON BONDS
Defined as total liabilities divided by total equity; shows the proportion of a company financed by non-owners (creditors) in comparison with that financed by owners.
DEBT-TO-EQUITY RATIO
Difference between a bond’s par value and its lower issue price or carrying value; occurs when the contract rate is less than the market rate.
DISCOUNT ON BONDS PAYABLE
Allocates interest expense over the bond life to yield a constant rate of interest; interest expense for a period is found by multiplying the balance of the liability at the beginning of the period by the bond market rate at issuance; also called INTEREST METHOD.
EFFECTIVE INTEREST METHOD
Fair Value Option (FVO) refers to an option to measure eligible items at fair value; eligible items include FINANCIAL ASSETS, such as HTM, AFS, and equity method investments, and FINANCIAL LIABILITIES. FVO is applied ‘instrument by instrument’ and is elected when the eligible item is ‘first recognized’; once FVO is elected the decision is ‘irrevocable.’ When FVO is elected it is measured at ‘fair value’ and unrealized gains and losses are recognized in earnings.
FAIR VALUE OPTION
Liability requiring a series of periodic payments to the lender.
INSTALLMENT NOTE
Contract specifying the rental of property.
LEASE
Interest rate that borrowers are willing to pay and lenders are willing to accept for a specific lending agreement given the borrowers’ risk level.
MARKET RATE
Legal loan agreement that protects a lender by giving the lender rights to be paid from the cash proceeds from the sale of a borrower’s assets identified in the mortgage.
MORTGAGE
Acquisition of assets by agreeing to liabilities not reported on the balance sheet.
OFF-BALANCE-SHEET FINANCING
Short-term (or cancelable) leases in which the lessor retains risks and rewards of ownership.
OPERATING LEASES
Amount the bond issuer agrees to pay at maturity and the amount on which cash interest payments are based; also called FACE AMOUNT or FACE VALUE of a bond.
PAR VALUE OF A BOND
Contractual agreement between an employer and its employees for the employer to provide benefits to employees after they retire; expensed when incurred.
PENSION PLAN
Difference between a bond’s par value and its higher carrying value; occurs when the contract rate is higher than the market rate; also called BOND PREMIUM.
PREMIUM ON BONDS
Bonds owned by investors whose names and addresses are recorded by the issuer; interest payments are made to the registered owners.
REGISTERED BONDS
Bonds that have specific assets of the issuer pledged as collateral.
SECURED BONDS
Bonds consisting of separate amounts that mature at different dates.
SERIAL BONDS
Bonds that require the issuer to make deposits to a separate account; bondholders are repaid at maturity from that account.
SINKING FUND BONDS
Method allocating an equal amount of bond interest expense to each period of the bond life.
STRAIGHT-LINE BOND AMORTIZATION
Bonds scheduled for payment (maturity) at a single specified date.
TERM BONDS
Bonds backed only by the issuer’s credit standing; almost always riskier than secured bonds; also called DEBENTURES.
UNSECURED BONDS
