Test 6 - Concepts and Terminology

Question 1

Bond Indenture

Answer 1

Contract between issuer and bondholder

Question 2

Debenture Bond

Answer 2

Company looking for a loan

Question 3

Types of Bonds

Answer 3

1) Serial - Payback principal @ Different dates
2) Term - Paid all @ one time
3) Convertible - Change the stock (Benefits holder)
4) Mortgage - Property attached to bond (Secure)
5) Callable - Issuer can withdraw @ specific dates (Benefits issuer)

Question 4

Callable Bonds reported as ______

Answer 4

Gains or losses under “Other Income” on Income Statement

Question 5

Discount Bonds

Answer 5

Market Rate > Contract Rate

Question 6

Premium Bonds

Answer 6

Market Rate < Contract Rate

Question 7

Carrying Amount (book value)

Answer 7

Difference of face amount and unamortized premiums

Question 8

Annuity

Answer 8

Series or equal cash receipts spaced equally in time

Question 9

Sell Price of Bonds

Answer 9

Face amount @ maturity date + periodic interest (Quoted as % of face value)
$1,000 bond quoted at 98 = $980
$1,000 bond quoted at 109 = $1090

Question 10

Amortization

Answer 10

Portion of the bond discount reduced and added to interest expense
(Discount/ # of interest payments)
(Premium/ # of interest payments)

Question 11

Bond Ratings

Answer 11

BBB - AAA = Good bonds

BB, B - C & D = High yield and bad bonds

Question 12

Corporation

Answer 12

Legal entity distinct and separate from owners

• Acquire, own, and dispose of property in own name
• Incur liabilities and enter into contracts
• Sells shares of ownership (STOCK)
• Pay federal income taxes
• Stockholders pay income tax on dividends they receive
• HIGHLY regulated
• Ownership rights are easily transferrable

Question 13

1st Step in Forming a Corporation

Answer 13

Apply for incorporation with the state (most choose Deleware)

Question 14

2nd Step in Forming a Corporation

Answer 14

Recieve charter which lays out which kind of stocks will be issued

Question 15

Paid - In Capital

Answer 15

Amount “paid - in” by investors to the company

Question 16

Stockholders Equity = 2 things?

Answer 16

1) Paid- in capital

2) Retained Earnings

Question 17

Retained Earnings

Answer 17

Funds reinvested in the business instead of paid out to dividends

Question 18

Common Stock

Answer 18

Equal rights shared across shareholders

Question 19

Preferred Stock

Answer 19

Preference to dividends and liquidation (Paid before Common Stock)

Question 20

Outstanding Shares

Answer 20

Amount of shares held by stockholders

Question 21

Par Value

Answer 21

Arbitrary amount/value given to shares of stock

Question 22

Premium Stock

Answer 22

Stock sold above par value

Question 23

Discount Stock

Answer 23

Stock sold below par value

Question 24

Treasury Stock

Answer 24

Stock a corporation has sold and then reacquired

• When bought back = Debit for cost
• When Sold again = Credit for cost
• Any difference b/w cost = Paid - capital from Sale of Treasury Stock

Question 25

Cash Dividends

Answer 25

Distribution of cash to stockholders (Board of directors must approve)

Question 26

Stock Dividends

Answer 26

Distribution of stock (Board of directors must approve)

Question 27

3 Conditions for a Distribution of Cash Dividends

Answer 27

1) Sufficient Retained Earnings
2) Sufficient Cash
3) Authorization from Board of Directors

Question 28

Cummulative Preferred Stock

Answer 28

Right to receive regular dividends that were not paid in prior years

Question 29

Arrears

Answer 29

Stock not paid in prior years

Question 30

Stock Split

Answer 30

Divides par value of common stock (Divide value) and multiplies number of shares (Multiply share)

Question 31

Restrictions on Retained Earnings

Answer 31

1) Legal = Laws that restrict Retained Earnings
2) Contractual = Contracts that a corporation enter into may restric Retained Earnings
3) Discretionary = When Board of Directors may set a restriction on Retained Earnings

Question 32

Earnings Per Share

Answer 32

Earnings per share of common stock OUTSTANDING during a period
EPS = (Net Income - Preferred Dividends/ Avg. number of common shares outstanding)