F5: Common Bonds Payable Definitions Flashcards
Bond Indenture
Contract between the issuer and lender
Face (PAR) Value
- Total dollar amount of bond
- When stated rate = market rate
Stated (nominal or coupon) interest rate
Specified in bond contract
Market (effective) interest rate
- Rate of interest actually earned
- Rate of return for comparable contracts
Discount
- 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
Premium
- When market rate is lower than stated rate
- Occurs because investor will pay more than face value dues to higher return offered
Debentures
Unsecured bonds
Mortgage bonds
Secured by real property
Collateral Trust Bonds
Secured bonds
Convertible Bonds
convertible into common stock at the option of the bondholder
Nondetachable warrants
The convertible bond itself must be converted into capital stock
Detachable warrants
The bond is not surrendered upon conversion, only the warrants plus cash are
Participating bonds
Not only have a stated rate of interest, but participate in income if certain earnings levels are obtained
Term bonds
- Bonds that have a single fixed maturity date
- Entire principal is paid at end of this term/period
Serial bonds
-Pre-numbered bonds that issuer may call and redeem a
portion
-Usually redeemed in a series of annual installments
Income bonds
Bonds that only pay interest if certain earnings levels are obtained
Zero coupon bonds
- AKA deep discount bonds
- Bonds sold with no stated interest but rather at a discount
- Redeemed at face value without periodic interest payments
Commodity-backed Bonds
- AKA asset-linked bonds
- Bonds that are redeemable either in cash or a stated volume of commodity, whichever is greater
Bonds usually are in denominations of:
$1,000
Bond issue costs
- Transaction costs
- Examples: legal fees, accounting/underwriting fees, printing
- Recorded as deferred asset and amortized straight line
Bond sinking funds
- A noncurrent asset
- An appropriation of retained earnings set aside to avoid a cash shortage at time of debt repayment
An alternative to sinking funds
- Serial bonds
- Allow issuer to match maturity dates with cash flow requirements, since these bonds have principals that mature in installments
Convertible bonds are usually issued at more or less than face value?
More
-Due to the conversion feature
GAAP: Issuance Price of convertible bonds is allocated how:
- Allocated to the bonds with no recognition of the conversion feature
- Why: difficult to assign a specific value to the conversion feature
