Chapter 10

Question 1

Series of equal payments at equal intervals.

Answer 1

ANNUITY

Question 2

Bonds made payable to whoever holds them (the bearer); also called UNREGISTERED BONDS.

Answer 2

BEARER BONDS

Question 3

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.

Answer 3

BOND

Question 4

Document containing bond specifics such as issuer’s name, bond par value, contract interest rate, and maturity date.

Answer 4

BOND CERTIFICATE

Question 5

Contract between the bond issuer and the bondholders; identifies the parties’ rights and obligations.

Answer 5

BOND INDENTURE

Question 6

Bonds that give the issuer the option to retire them at a stated amount prior to maturity.

Answer 6

CALLABLE BONDS

Question 7

Long-term leases in which the lessor transfers substantially all risk and rewards of ownership to the lessee.

Answer 7

CAPITAL LEASES

Question 8

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.

Answer 8

CARRYING (BOOK) VALUE OF BONDS

Question 9

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.

Answer 9

CONTRACT RATE

Question 10

Bonds that bondholders can exchange for a set number of the issuer’s shares.

Answer 10

CONVERTIBLE BONDS

Question 11

Bonds with interest coupons attached to their certificates; bondholders detach coupons when they mature and present them to a bank or broker for collection.

Answer 11

COUPON BONDS

Question 12

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.

Answer 12

DEBT-TO-EQUITY RATIO

Question 13

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.

Answer 13

DISCOUNT ON BONDS PAYABLE

Question 14

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.

Answer 14

EFFECTIVE INTEREST METHOD

Question 15

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.

Answer 15

FAIR VALUE OPTION

Question 16

Liability requiring a series of periodic payments to the lender.

Answer 16

INSTALLMENT NOTE

Question 17

Contract specifying the rental of property.

Answer 17

LEASE

Question 18

Interest rate that borrowers are willing to pay and lenders are willing to accept for a specific lending agreement given the borrowers’ risk level.

Answer 18

MARKET RATE

Question 19

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.

Answer 19

MORTGAGE

Question 20

Acquisition of assets by agreeing to liabilities not reported on the balance sheet.

Answer 20

OFF-BALANCE-SHEET FINANCING

Question 21

Short-term (or cancelable) leases in which the lessor retains risks and rewards of ownership.

Answer 21

OPERATING LEASES

Question 22

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.

Answer 22

PAR VALUE OF A BOND

Question 23

Contractual agreement between an employer and its employees for the employer to provide benefits to employees after they retire; expensed when incurred.

Answer 23

PENSION PLAN

Question 24

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.

Answer 24

PREMIUM ON BONDS

Question 25

Bonds owned by investors whose names and addresses are recorded by the issuer; interest payments are made to the registered owners.

Answer 25

REGISTERED BONDS

Question 26

Bonds that have specific assets of the issuer pledged as collateral.

Answer 26

SECURED BONDS

Question 27

Bonds consisting of separate amounts that mature at different dates.

Answer 27

SERIAL BONDS

Question 28

Bonds that require the issuer to make deposits to a separate account; bondholders are repaid at maturity from that account.

Answer 28

SINKING FUND BONDS

Question 29

Method allocating an equal amount of bond interest expense to each period of the bond life.

Answer 29

STRAIGHT-LINE BOND AMORTIZATION

Question 30

Bonds scheduled for payment (maturity) at a single specified date.

Answer 30

TERM BONDS

Question 31

Bonds backed only by the issuer’s credit standing; almost always riskier than secured bonds; also called DEBENTURES.

Answer 31

UNSECURED BONDS