Chapter 13

Question 1

annuities

Answer 1

Streams of level (i.e., the same amount each period) payments occurring on regular intervals.

Question 2

bonds payable

Answer 2

An obligation divided into transferable units requiring the issuer to make periodic interest payments and an eventual repayment of the face amount.

Question 3

callable bond

Answer 3

A bond that provides the issuer an option to reacquire the bonds before scheduled maturity at a preset price.

Question 4

commitments

Answer 4

Promises to engage in some future action; not necessarily creating a recordable accounting liability but potentially necessitating enhanced disclosure.

Question 5

compound interest

Answer 5

Interest calculations that provide for periodic inclusion of accumulated interest into the base on which interest is calculated; “interest on the interest”

Question 6

convertible bond

Answer 6

A bond that may be converted by the holder into stock of the issuing company.

Question 7

coupon bond.

Answer 7

A bond that has detachable coupons that are exchanged for interest payments; historically popular but falling into disuse.

Question 8

debenture bond

Answer 8

A bond that lacks specific collateral; payment is only assured by the general faith and creditworthiness of the issuer.

Question 9

effective-interest amortization

Answer 9

A theoretically preferable method for amortizing premiums and discounts on bonds; interest expense is a constant percentage of the bonds ever-changing carrying value.

Question 10

future value

Answer 10

The amount to which an interest-earning amount is expected to grow over a stipulated time period at a given interest rate.

Question 11

junk bond

Answer 11

A bond that is issued by a company of low credit worthiness, and entails substantial risk of nonpayment; generally offers a high interest rate to compensate for the high risk.

Question 12

nonredeemable bond

Answer 12

A bond that cannot be paid off before scheduled maturity

Question 13

nonrefundable bond

Answer 13

A bond that cannot be paid off with the proceeds of a new debt issue.

Question 14

present value

Answer 14

The calculated value today of an amount to be received in the future, based upon an assumed interest rate (the reciprocal of future value)

Question 15

register bond

Answer 15

A bond for which ownership records are maintained, and interest is paid to the registered owner.

Question 16

secured bond

Answer 16

A bond that provides specific assets as collateral to help assure the payment stream.

Question 17

serial bond

Answer 17

A bond issue that has multiple repayment dates, rather than the entire issue maturing at one fixed maturity date.

Question 18

simple interest

Answer 18

Interest calculations that do not provide for periodic inclusion of accumulated interest into the base on which interest is calculated.

Question 19

sinking fund bond

Answer 19

A bond issue that requires periodic setting aside of monies into a separate fund to provide for eventual repayment of the debt at maturity.