Longterm Debt Flashcards
Effective method of interest recognition
recognizes interest based on the unpaid balance of debt
Straight line method of interest recognition
recognizes same amt of int and discount amortization each period
Stated rate on a note is presumed to be fair unless
- Face amt of note is materially diff from current cash price for item exchanged or the current FV of the debt instrument
- No interest rate stated (non-int bearing note)
- the stated rate is unreasonable
Indenture
a legal contract representing debt
Debenture
unsecured bond
Sinking fund
funds set aside typically with a trustee to retire bonds
Discount
bond sold for less than Face value, effective rate > stated rate
Premium
bond sold for more than Face value, effective rate < stated rate
Term Bond
int payments are made periodically, face value is paid on maturity date
Serial Bond
structured so a portion of the bonds mature at intervals
Convertible Bond
rights to convert a bond into shares of stock
Zero coupon
no periodic payments are made. Bond sold at discount with full face value paid at maturity
Mortgage Bond
Bond secured with real estate
Junk Bond
unsecured bond of high risk issuer
Bond issue costs
accounting, legal, printing, registering and underwriting fees
Troubled Debt Restructuring (TDR)
modification of terms or a settlement amount
Debt Covenant
clause in a debt instrument contract included to protect the creditor, rights and actions of two parties if conditions defined in the covenant occur
Annuity due
Series of payments/receipts which occur at beginning of the period
Imputed interest rate
Represents the debtor’s incremental borrowing rate
Fair value of note
Maturity value of note and interest payments discounted to the present value
Note issued at a discount
This will result when face rate of the note < yield rate
Premium on a note
The difference between the present value of the note and the cash exchanged when the market rate of interest < rate on note
Simple interest method
Periodic interest is computed based on the principal balance only
Interest revenue/expense
Effective interest rate × Net receivable or payable balance at the beginning of the period
Future value of annuity
The amount which will be available in the future as a result of consecutive payments/receipts at the end of each period—compounded at a specified interest rate
Face of note equals present value of the note
No premium or discount exists
