Chapter 10 GLOSSARY REVIEW

Question 1

Bond Certificate

Answer 1

A legal document that indicates the name of the issuer, the face value of the bonds, and other data such as the contractual interest rate and the maturity date of the bonds.

Question 2

Bonds

Answer 2

A form of interest-bearing notes payable issued by corporations, universities, and governmental agencies.

Question 3

Callable Bonds

Answer 3

Bonds that the issuing company can redeem (buy back) at a stated dollar amount prior to maturity.

Question 4

Capital Lease

Answer 4

A contractual agreement allowing one party (the lessee) to use the assets of another party (the lessor) ; accounted for like a debt-financed purchase by the lessee.

Question 5

Contingencies

Answer 5

Events with uncertain outcomes that may represent potential liabilities.

Question 6

Contractual (stated) Interest Rate

Answer 6

Rate used to determine the amount of interest the issuer pays and the investor receives.

Question 7

Convertible Bonds

Answer 7

Bonds that can be converted into com- mon stock at the bondholder’s option.

Question 8

Current Liability

Answer 8

A debt that a company reasonably expects to pay (1) from existing current assets or through the creation of other current liabilities, and (2) within one year or the operating cycle, whichever is longer.

Question 9

Discount (on a bond)

Answer 9

The difference between the face value of a bond and its selling price when a bond is sold for less than its face value.

Question 10

Effective-Interest method of Amortization

Answer 10

A method of amortizing bond discount or bond premium that results in periodic interest expense equal to a constant percentage of the carrying value of the bonds.

Question 11

Effective-Interest Rate

Answer 11

Rate established when bonds are issued that maintains a constant value for interest ex- pense as a percentage of bond carrying value in each interest period.

Question 12

Face Value

Answer 12

Amount of principal due at the maturity date of the bond.

Question 13

Long-Term Liabilities

Answer 13

Obligations that a company expects to pay more than one year in the future.

Question 14

Market Interest Rate

Answer 14

The rate investors demand for loaning funds to the corporation.

Question 15

Maturity Date

Answer 15

The date on which the final payment on a bond is due from the bond issuer to the investor.

Question 16

Mortgage Note Payable

Answer 16

A long-term note secured by a mortgage that pledges title to specific assets as security for the loan.

Question 17

Notes Payable

Answer 17

An obligation in the form of a written note.

Question 18

Unsecured Bonds

Answer 18

Bonds issued against the general credit of the borrower.

Question 19

Time Value of Money

Answer 19

The relationship between time and money. A dollar received today is worth more than a dollar promised at some time in the future.

Question 20

Times Interest Earned

Answer 20

A measure of a company’s solvency, calculated by dividing the sum of net income, interest expense, and income tax expense by interest expense.

Question 21

Straight-Line Method of Amortization

Answer 21

A method of amortizing bond discount or bond premium that allocates the same amount to interest expense in each interest period.

Question 22

Secured Bonds

Answer 22

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

Question 23

Present Value

Answer 23

The value today of an amount to be received at some date in the future after taking into account current interest rates.

Question 24

Premium (on a bond)

Answer 24

The difference between the selling price and the face value of a bond when a bond is sold for more than its face value.

Question 25

Operating Lease

Answer 25

A contractual agreement allowing one party (the lessee) to use the asset of another party (the lessor); accounted for as a rental.

Question 26

Off-Balance-Sheet Financing

Answer 26

The intentional effort by a company to structure its financing arrangements so as to avoid showing liabilities on its balance sheet.