F5: Common Bonds Payable Definitions

Question 1

Bond Indenture

Answer 1

Contract between the issuer and lender

Question 2

Face (PAR) Value

Answer 2

• Total dollar amount of bond

- When stated rate = market rate

Question 3

Stated (nominal or coupon) interest rate

Answer 3

Specified in bond contract

Question 4

Market (effective) interest rate

Answer 4

• Rate of interest actually earned

- Rate of return for comparable contracts

Question 5

Discount

Answer 5

• When market rate is higher than the stated rate

- Occurs because bonds sell for less than face value to make up for lower return being provided

Question 6

Premium

Answer 6

• When market rate is lower than stated rate

- Occurs because investor will pay more than face value dues to higher return offered

Question 7

Debentures

Answer 7

Unsecured bonds

Question 8

Mortgage bonds

Answer 8

Secured by real property

Question 9

Collateral Trust Bonds

Answer 9

Secured bonds

Question 10

Convertible Bonds

Answer 10

convertible into common stock at the option of the bondholder

Question 11

Nondetachable warrants

Answer 11

The convertible bond itself must be converted into capital stock

Question 12

Detachable warrants

Answer 12

The bond is not surrendered upon conversion, only the warrants plus cash are

Question 13

Participating bonds

Answer 13

Not only have a stated rate of interest, but participate in income if certain earnings levels are obtained

Question 14

Term bonds

Answer 14

• Bonds that have a single fixed maturity date

- Entire principal is paid at end of this term/period

Question 15

Serial bonds

Answer 15

-Pre-numbered bonds that issuer may call and redeem a
portion
-Usually redeemed in a series of annual installments

Question 16

Income bonds

Answer 16

Bonds that only pay interest if certain earnings levels are obtained

Question 17

Zero coupon bonds

Answer 17

• AKA deep discount bonds
• Bonds sold with no stated interest but rather at a discount
• Redeemed at face value without periodic interest payments

Question 18

Commodity-backed Bonds

Answer 18

• AKA asset-linked bonds

- Bonds that are redeemable either in cash or a stated volume of commodity, whichever is greater

Question 19

Bonds usually are in denominations of:

Answer 19

$1,000

Question 20

Bond issue costs

Answer 20

• Transaction costs
• Examples: legal fees, accounting/underwriting fees, printing
• Recorded as deferred asset and amortized straight line

Question 21

Bond sinking funds

Answer 21

• A noncurrent asset

- An appropriation of retained earnings set aside to avoid a cash shortage at time of debt repayment

Question 22

An alternative to sinking funds

Answer 22

• Serial bonds
• Allow issuer to match maturity dates with cash flow requirements, since these bonds have principals that mature in installments

Question 23

Convertible bonds are usually issued at more or less than face value?

Answer 23

More

-Due to the conversion feature

Question 24

GAAP: Issuance Price of convertible bonds is allocated how:

Answer 24

• Allocated to the bonds with no recognition of the conversion feature
• Why: difficult to assign a specific value to the conversion feature

Question 25

Two ways the conversion of bonds to stock may be recorded:

Answer 25

• Book value method (GAAP)

- Market value method (not GAAP)

Question 26

Book Value method

Answer 26

-No gain/loss recognized

Question 27

Market Value method

Answer 27

-Gain/loss recognized