Chapter 10 Key terms and definitions

Question 1

What is an annuity?

Answer 1

Series of equal payments at equal intervals.

Question 2

What are bearer bonds?

Answer 2

Bonds made payable to whoever holds them (the bearer); also called unregistered bonds.

Question 3

What is a bond?

Answer 3

Written promise to pay the bonds par value (or face value) and interest at a stated contract rate; often issued in denominations of 1000.

Question 4

What is a bond certificate?

Answer 4

Document containing bond specifics such as issuers name, bond par value and interest rate, and maturity date.

Question 5

What is a bond indenture?

Answer 5

Contract between the bond issuer and the bondholder; it identifies the partys rights and obligations.

Question 6

What is a Callable Bond?

Answer 6

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

Question 7

What are Capital Leases?

Answer 7

Long term leases in which the lessor transfer all of the risks and rewards of ownership to the lessee.

Question 8

What is Carrying Value (Book) Value of bonds?

Answer 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.

Question 9

What is a Contract Rate?

Answer 9

Interest rate specified in a bond indenture ( or note); it is multiplied by the par value to determine the amount of interest paid each period; also called coupon rate, stated rate or nominal rate.

Question 10

What are convertible bonds?

Answer 10

Bonds that bondholders can exchange for a set number of the issuers shares.

Question 11

What are coupon bonds?

Answer 11

Bond with interest coupons attached to the certificate; Bondholders detach the coupons when they mature and take them to a bank to be redeemed.

Question 12

What is the debt to equity ratio?

Answer 12

Defined as total liabilities divided by total equity; show the proportion of a company financed by non owners (creditors) in comparison to with that financed by the owners.

Question 13

What is a discount on bonds payable?

Answer 13

Is the difference between a bonds par value and its lower issue price or the bonds carrying value; it occurs when the bonds contract rate is less than the market rate.

Question 14

What is the effective interest method?

Answer 14

Allocates interest expense over the bond life to yield a constant rate of interest; the 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 the interest method.

Question 15

What is the fair value option?

Answer 15

Reporting option that permits a company to use fair value in reporting certain asset and liabilities, which is presently based on a 3 level system to determine fair value.

Question 16

What is a installment note?

Answer 16

Liability requiring a series of periodic payments to the lender.

Question 17

What is a lease?

Answer 17

Contract specifying the rental of property.

Question 18

What is market rate?

Answer 18

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

Question 19

What is a Mortgage?

Answer 19

Legal loan agreement that protects a lender by giving the lender the right to be paid from the cash proceeds from the sale of a borrowers assets identified in the mortgage.

Question 20

Off balance sheet financing?

Answer 20

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

Question 21

What are Operating leases?

Answer 21

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

Question 22

What is the par value of a bond?

Answer 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.

Question 23

What is a pension plan?

Answer 23

Contractual Agreement from the employer to the employee for the employer to provide benefits to the employees after they retire; Expensed when incurred.

Question 24

What are premiums on bonds?

Answer 24

Difference between the bonds par value and its higher carrying value; it occurs when the contract rate is higher than the marketing rate; also called bond premium.

Question 25

What are registered bonds?

Answer 25

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

Question 26

What are secured bonds?

Answer 26

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

Question 27

What is a serial bond?

Answer 27

Bonds consisting of separate amounts that mature at different dates.

Question 28

What are sinking fund bonds?

Answer 28

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

Question 29

What is straight line bond amortization?

Answer 29

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

Question 30

What are term bonds?

Answer 30

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

Question 31

What are unsecured bonds?

Answer 31

Bonds backed only by the issuers credit standing; almost always riskier than secured bonds; also called debentures.