Chapter 9 Key Words

Question 1

Borrowing money from creditors (liabilities).

Answer 1

debt financing

Question 2

Obtaining investment from stockholders (stockholders’ equity).

Answer 2

equity financing

Question 3

The mixture of liabilities and stockholders’ equity in a business.

Answer 3

capital structure

Question 4

Includes both an amount that represents interest and an amount that represents a reduction of the carrying value

Answer 4

installment payment

Question 5

Provides a table format detailing the cash payment each period, the portions of each cash payment that represents interest and the change in carrying value, and balance of the carrying value.

Answer 5

amortization schedule

Question 6

The amount for which a liability is reported in the balance sheet

Answer 6

carrying value

Question 7

A contractual arrangement by which the lessor (owner) provides the lessee (user) the right to use an asset for a specified period of time.

Answer 7

lease

Question 8

A formal debt instrument issued by a company to borrow money. The issuing company (borrower) is obligated to pay back to the investor (lender): (1) a stated amount, referred to as the principal or face amount, at a specified maturity date and (2) periodic interest payments over the life of the bond.

Answer 8

bond

Question 9

The rate specified in the bond contract used to calculate the cash payments for interest.

Answer 9

stated interest rate

Question 10

Sale of debt securities directly to a single investor.

Answer 10

private placement

Question 11

Bonds that are supported by specific assets pledged as collateral.

Answer 11

secured bonds

Question 12

Bonds that are not supported by specific assets pledged as collateral

Answer 12

unsecured bonds

Question 13

Bonds that require payment of the full principal amount at a single maturity date.

Answer 13

term bonds

Question 14

An investment fund used to set aside money to be used to pay debts as they come due.

Answer 14

sinking fund

Question 15

Bonds that require payment of the principal amount of the bond over a series of maturity dates.

Answer 15

serial bonds

Question 16

A bond feature that allows the borrower to repay the bonds before their scheduled maturity date at a specified call price.

Answer 16

callable

Question 17

A bond feature that allows the lender (or investor) to convert each bond into a specified number of shares of common stock.

Answer 17

convertible

Question 18

An implied rate based on the price investors are willing to pay to purchase a bond in return for the right to receive the face amount at maturity and periodic interest payments over the remaining life of the bond.

Answer 18

market interest rate

Question 19

The risk that a company will be unable to pay the bond’s face amount or interest payments as they become due.

Answer 19

default risk

Question 20

A bond’s issue price is below the face amount.

Answer 20

discount

Question 21

A bond’s issue price is above the face amount.

Answer 21

premium

Question 22

The issuer retires debt before its scheduled maturity date.

Answer 22

early extinguishment of debt

Question 23

Cash payments of equal amounts over equal time periods.

Answer 23

annuity

Question 24

Refers to a company’s ability to pay its current and long-term obligations.

Answer 24

solvency

Question 25

Total liabilities divided by total stockholders’ equity; measures a company’s risk.

Answer 25

debt to equity ratio

Question 26

Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets

Answer 26

return on assets

Question 27

Ratio that compares interest expense with income available to pay those charges.

Answer 27

times interest earned ratio