Chapter 15: Non-Current Liabilities Flashcards
What are non-current liabilities?
An obligation that a company expects to pay more than one year in the future
ex. Bonds payable, instalment notes payable, lease obligations
What are the advantages of debt over equity?
1) Shareholder control is not affected
- Debt holders (lenders) have no voting rights
2) Income tax savings result
- Interest expense is deductible for income tax purposes, dividends are not deductible
3) Earnings per share may be higher
- No common shares at issued, therefore resulting by in a higher earnings per share
What are bonds?
A promise to repay a specified amount borrowed in the future along with periodic interest at a specific rate
What is a secret bond?
Bonds with specific assets pledged as collateral by the bond issuer
What is a sinking fund bond?
Bonds secured by specific assets set assist to redeem (retire) the bonds
What is a mortgage bond?
A bond secured by real estate
What is an unsecured bond (debentures )?
Bonds issued against the general credit of the borrower
What is a convertible bond?
Bonds that can be converted into common shares at the bondholder’s option
What are callable bonds?
Bonds that allow the company to buy back (redeem) bonds at a stated dollar amount prior to maturity
Who approves of issuing the bonds?
Board of directors
What is the face value (par value/maturity value) of a bond?
The amount of principal due at the maturity date
What is the contractual interest rate (coupon rate /stated rate) of a bond?
The rate send to determine the amount of cash interest the issuing company pays and the investor receives. It is usually an annual rate, but paid semi-annually
What is the maturity date?
The date when the final payment is due to the investor from the issuing company
Where are bond issuance details included?
The bond certificate
What is the market interest rate (effective interest rate)?
Rate that investors require for lending money to a company
