Chapter 9: Long-Term Liabilities Flashcards
a formal agreement or contract a company signs when borrowing money from a bank. They are frequently issued in exchange for a non cash asset such as equipment.
notes payable
Larger corporations issue ______ instead of notes.
bonds
a type of note that requires the issuing entity to pay the face value of the bond to the holder when it matures and usually to pay interest periodically at a specified rate. (generally paid semi-annually)
bond
A bond issue essentially breaks down a large ______ (large corporations frequently borrow hundreds of millions of dollars) into smaller chunks (usually $1,000) because the total amount borrowed is too large for a _____ lender.
debt; single
Accounting for notes payable and bonds payable is _________, besides the name (Notes Payable/Bonds Payable).
identical
the amount a borrower must repay at maturity
face value (also called par value or principal)
Typically face value is paid at maturity, but some are paid in monthly installments. These contracts typically require ______ payments to be made each period. A portion of each payment is _______ and a portion is _______.
Equal; principal; interest
What are 3 installment loan examples?
Car, student, and home loans
Historically, interest payments were called _______ payments. Terminology is still used today, but now the payments are automatically sent to the registered ________.
coupon; bondholder
What are 3 other names for bond interest rate?
- Stated Rate
- Coupon Rate
- Contract Rate
What is the formula to calculate the periodic bond interest payment?
Face Value x Interest Rate x Time (in years)
(time in years= the number of interest payments per year)
a bond with pledged collateral against the corporation’s ability to pay.
secured bond
A secured bond is (more/less) risky, more attractive to (borrowers/lenders), secured by companies _______, and a (higher/lower) interest rate.
less; lenders; assets; lower
a bond secured by real estate
mortgage bond
a mortgage bond is a type of ______ bond.
secured
a bond with no collateral attached, which relies on the general credit of the corporation
unsecured bond (also called debenture bond)
T or F: most bonds are unsecured.
true
Unsecured bondholders are the (first/last) lenders to be paid in bankruptcy (only the stockholders follow).
last
Unsecured bonds are (more/less) risky, and have a (lower/higher) stated interest rate.
more; higher
unsecured bonds where the risk of the borrower failing to make the payments is relatively high.
junk bond
Why would anyone lend money for a junk bond?
Because they receive a high enough rate of interest to compensate them for the risk.
a bond that gives the borrower (corporation) the right to call in the bond prior to its maturity date, thus paying off the bondholders earlier than expected.
callable bond
For a callable bond, the borrower typically “calls” debt when the interest rate being paid is much (higher/lower) than the current market conditions.
higher
T or F: a callable bond is not as attractive to investors.
true
a bond that gives the bondholder the right to convert the bond into another security, usually common stock; these bonds will specify the conversion ratio
convertible bonds
issuer of the bonds, seller
borrower
bondholder/creditor
lender
debt instruments that require borrowers to pay the lender the face value and usually to make periodic interest payments.
notes/bonds
amount of money the borrower agrees to repay at maturity.
face value/par value/ principal
date on which the borrower agrees to pay the creditor the face (or par) value.
maturity date
rate of interest paid on the face (or par) value. For bonds, the borrower pays the interest to the creditor each period until maturity.
stated/coupon/contract rate
market rate of interest demanded by creditors. This is a function of economic factors and the creditworthiness of the borrower. It may differ from the stated rate.
market/yield/effective rate
Borrowing through the use of notes/bonds is attractive to businesses as a source of money because the relative cost of issuing debt (the interest payments) is often (higher/lower) than the cost of issuing equity (giving up ownership shares).
lower
Bonds are frequently sold to the public through an ________.
underwriter
generate a profit either by offering a price that is slightly less than the expected market price (thereby producing a profit on resale) or by charging the borrower a fee.
underwriters
Businesses may sell bonds directly to institutions such as: (2)
insurance companies or pension funds
Underwriters examine what 3 things to determine the market (yield) rate of interest for the bond?
1.the provisions of the instrument (secured or unsecured, callable or not callable, convertible or not convertible)
2. the credit standing of the borrowing business
3. the current conditions in the credit markets and the economy as a whole
Why can the market rate possibly differ from the stated rate? (3 things)
- The underwriter disagrees with the borrower as to the correct market/yield rate
- Changes in the economy
- Changes in the creditworthiness of the borrower between the date of setting the stated rate and the date of issue.
T or F: Market value of bonds is always the same as their face value.
false; NOT always
When market/yield rate = stated rate of interest, the bond sells at ______.
par (the face value)
When market/yield rate is LESS than the stated rate of interest, the bond sells at a _______.
premium
When bonds are sold at a _______, the bonds represent particularly good investments because the interest payments are (higher/lower) than the market.
premium; higher
when a bond’s selling price is above face value.
premium