Chapter 14

Question 1

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

Answer 1

Bearer bonds

Question 2

Contract between the bond issuer and the bondholders; identifies the parties’ rights and obligations.

Answer 2

Bond indenture

Question 3

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

Answer 3

Callable bonds

Question 4

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.

Answer 4

Carrying (book) value of bonds

Question 5

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

Answer 5

Contract rate

Question 6

Bonds that bondholders can exchange for a set number of the issuer’s shares.

Answer 6

Convertible bonds

Question 7

Bonds with interest coupons attached to their certificates; bondholders detach coupons when they mature and present them to a bank or broker for collection.

Answer 7

Coupon bonds

Question 8

Atype of debt instrument that is not secured by physical assets or collateral; Backed only by the general creditworthiness and reputation of the issuer. Also called an unsecured bond

Answer 8

Debenture

Question 9

Allocates interest expense Difference between a bond’s par value and its lower issue price or carrying value; occurs when the contract rate is less than the market rate.

Answer 9

Discount on bonds payable

Question 10

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

Answer 10

Effective interest method

Question 11

Liability requiring a series of periodic payments to the lender.

Answer 11

Installment note

Question 12

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

Answer 12

Market rate

Question 13

Difference between a bond’s par value and its higher carrying value; occurs when the contract rate is higher than the market rate; also called bond premium.

Answer 13

Premium on bonds

Question 14

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

Answer 14

Secured bonds

Question 15

Bonds consisting of separate amounts that mature at different dates.

Answer 15

Serial bonds

Question 16

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

Answer 16

Sinking fund bonds

Question 17

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

Answer 17

Straight-line bond amortization

Question 18

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

Answer 18

Term bonds

Question 19

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

Answer 19

Unsecured bonds