Chapter 13

Question 1

Term loan

Answer 1

“interest only” is paid during the period of borrowing

Question 2

future value

Answer 2

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

Question 3

compound interest

Answer 3

investment is growing with accumulated interest and earning interest on previously accrued interest

Question 4

simple interest

Answer 4

Simple interest does not provide for compounding, such that $1 invested for two years at 10% would only grow to $1.20.

Question 5

(1+i)n

Answer 5

Where “i” is the interest rate per period and “n” is the number of periods

= “future value of a lump sum amount.”

Question 6

Present value

Answer 6

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 7

1/(1+i)n

Present

Answer 7

1/(1+i)n

Where “i” is the interest rate per period and “n” is the number of periods

Question 8

annuities

Answer 8

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

Question 9

Note payments

Answer 9

Present Value of Annuity = Payments X Annuity Present Value Factor

$100,000 = Payment X 4.21236 (from table)present value ordinary annuity table

Payment = $100,000 / 4.21236 = $23,739.64

Question 10

Bonds Payable

Answer 10

borrower splits large loan into many small units or bonds which is essentially a note payable

investors buy bonds making a loan to the issuing company

Question 11

bond indenture

Answer 11

terms of bond

Question 12

debenture

Answer 12

no collateral to insure payment

Question 13

coupon bonds

Answer 13

detachable interest coupons stripped off and cashed in on certain dates

Question 14

registered bonds

Answer 14

registered to owner
vs.
bearer bonds - rare today

Question 15

sinking fund bond

Answer 15

is a required account into which money is periodically transferred to insure funds will be available at maturity

Question 16

serial bonds

Answer 16

rather than issue maturity at once - portions issue on select dates

Question 17

convertible bonds

Answer 17

enable holder to trade for stock
may be better if stock value increases -be more money than interest payment

callable- force to cash out or convert
company will reserve this call privilege because they will want to stop paying interest (by forcing the holder out of the debt) once the stock has gone up enough to know that a conversion is inevitable.

good for company due to lower interest rate

Question 18

callable bonds

Answer 18

provide company with the option of buying back the debt at prearrange price before maturity

if interest rates go down they can escape higher obligation by calling back debt

Question 19

junk bond

Answer 19

company in distress issues a high interest rate bond to investors who are willing to take a chance to bail out the company

Question 20

nonredeemable bond

Answer 20

cannot be paid off earlier

Question 21

nonrefundable bond

Answer 21

can be paid off earlier if pay off is from business operations not other source

Question 22

bond trustee

Answer 22

trustee may be an investment company, law firm, or other independent party. The trustee is to monitor compliance with the terms of the agreement and has a fiduciary duty to intervene to protect the investor group if the company runs afoul of its covenants.

Question 23

bond payable

Answer 23

promise to pay a series of payments over time (the interest component) and a fixed amount at maturity (the face amount). Thus, it is a blend of an annuity (the interest) and lump sum payment (the face).

Question 24

Debt to Total Assets Ratio

Answer 24

Total Debt / Total Assets

Question 25

Debt to Equity Ratio

Answer 25

Total Debt / Total Equity

Question 26

ratios

Answer 26

seen as signs of financial strength when “small,” or signs of vulnerability when “large.”

utilities, are inherently dependent on debt financing but may, nevertheless, be very healthy. On the other hand, some high-tech companies may have little or no debt but be seen as vulnerable due to their intangible assets with potentially fleeting value

Question 27

Times Interest Earned Ratio

Answer 27

Income Before Income Taxes and Interest / Interest Charges

demonstrates how many times the income of a company is capable of covering its unavoidable interest obligation

If this number is relatively small, it may signal that the company is on the verge of not generating sufficient operating results to cover its mandatory interest obligation.

Question 28

effective-interest method

Answer 28

preferable approach

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 29

effective-interest calculation

Answer 29

Interest expense:
effective-interest rate X the bond’s carrying value for each period

Amount of amortization:
difference between the cash paid for interest and the calculated amount of bond interest expense.