Chapter 14 Flashcards
Debenture bond
Backed only by full faith and credit issuing corporations
Subordinated Debenture
Not entitled to receive any liquidation payments until claims of other specified debt issues are satisfied
Mortgage Bond
Backed by a lien on real estate owned by the issuer
Commands lower interest rate
Callable (redeemable)
Issuing company can buy back before scheduled maturity date
Call Price must:
-Be prespecified
-Exceeds face amouts
serial bonds
retired installments during all or part of life of issue
convertible bonds
Retired as a consequence of bondholders choosing to convert them into shares of stock
Sinking Fund Debentures
Bonds that must be redeemed on a prespecified year-by-year basis
specified debt issues are satisfied
Effective Interest Rate Formula
Interest Expense= Effective market rate of interest X Outstanding Balance
Straight Line Method
Allocates Discounts (or Premium) equally to each interest period
Underwriting Fee Formula
Spread between the price the underwrite pays and the resale price
Private Placement
Debt securities are sold directly to a single investor
Debt issue costs for the issuing company
-underwriting frees
-Legal and accounting fees
-Registration
Recording Debt Issue Costs
-Combine with discount (or subtracted from premium)
-Amortized over life of debt
If the note interest rate does NOT equal market rate
Value of the asset or service exchanged for the note establishes the market rate
In the balance sheet, disclosure should include for all long-term borrowings:
-the aggregate amounts maturing
-sinking fund requirements (if any) for each of the next five years.
Supplemental disclosures are needed for
(a) off-balance-sheet credit or market risk,
(b) concentrations of credit risk, and
(c) the fair value of financial instruments.
Debt to equity ratio
Total liabilities ÷ Shareholders’ equity
Times interest earned ratio
(Net income + interest + Taxes) ÷ Interest
Return on assets
Net income ÷ Total assets
Return on equity
Net income ÷ Shareholders’ equity
Gain or Loss on early extinguishment of debt Formula
Book Value - Reacquisition price
bond indenture
document that describes specific promises made to bondholders.
premium
arises when bonds are sold for more than face amount.
discount
arises when bonds are sold for less than face amount.
When discounted interest free bonds are issued
The amount of cash receive is less than the face value of the bond
(Cash received represents present value of the face value)
Effective annual interest rate will be higher than discount rate
Face value
Amount to be repaid at maturity
notes payable
when a company borrows cash from a bank and signs a promissoy note
Electing FVO
reporting unrealized holding gains and losses in OCI
When debt is issued at a premium, interest expense over the term of debt equals the
cash interest paid minus premium
bonds’ carrying amount at the end of Year formula
Carrying Amount at Beginning of Year + Amortization of Discount
