Chapter 14

what are the 3 primary types of bond

debenture, subordinated debenture, mortgage

what is a debenture bond

backed by the full faith and credit of the issuing corporation

what is a subordinated debenture bond

not entitled to receive any liquid payments until other claims on other specified debt issues have been satisfied

what is a mortgage bond

backed by a lien on specific real estate owned by the issuer

what is a bond indenture

document that describes the specific promises made to bondholders

most corporate bonds are

callable (redeemable)

what is callable (redeemable bonds)

can be bought back early

what is a serial bond

retired in installments during all or part of the life of the bond issue

what is a convertible bond

retired as a consequence of bondholders choosing to convert them to stock

what is stated interest rate

coupon rate, face rate, determines cash payments

what is market interest rate

effective rate, determines price of a bond

if a bond sells for more than face amount, it is a…

premium

if a bond sells for less than the face amount, it is a…

discount

what is a zero coupon bond

a bond that pays no periodic interest payments

what is the advantage of the coupon bond for the issuer

no cash flow/payment

what is the disadvantage for investor

not getting cash inflow,

what is the effective interest method formula

market rate * outstanding balance

what is the straight line method

the discount or premium is allocated equally over the term

what does debt issue cost reduce

cash proceeds from issuance of the debt

how are debt issue cost recorded in JE

debit to discount account and amortized over term to maturity

what is long term notes

notes issued for cash

notes can be exchanged for

assets or services

when note paid in full at the time of purchase, asset recorded at

price paid/historical cost

when note paid for over time, asset is recorded at

pv of future cash flows, discounted by market rate

the value of asset or service exchanged establishes the

market rate

when interest rates are unknown or unrealistic, interest rate understood in the agreement is

implicit rate of interest

deciding what appropriate rate should be is called

imputing an interest rate

what is substance over form

the economic essence of a transaction should prevail over its appearance

what are installment notes

involve series of equal payment that each include portion of principle/int

payment is calculated by (formula)

loan amt/discount factor

interest is calculated by (formula)

outstanding balance*effective rate

balance is…at the maturity date

zero

long term debt is typically reported as a

single amount, net discount or premium

fair value of financial instruments must be

disclosed in financial statements or notes

notes should include (8)

nature of debt, interest rate, maturity date, call provision, conversion options, restriction imposed by creditors, assets pledged as collateral, amt payable for next 5 year

what is early extinguishment of debt

when debt of any kind is retired prior to its scheduled maturity date

diff between outstanding balance and amt paid represent a

gain or loss

what are convertible bonds

can be exchanged for shares of stock at the option of the bondholder

entire issue price of convertible bond is recorded as

debt

when bondholder exercises a conversion option, new shares are issued at

book value of bond (carrying value)

how to companies induce conversion

call provisions or making a better offer

what is a stock warrant

gives investor an option to purchase stated number of shares of common stock at specified option price within a given period of time

changes in interest rate causes changes in

fair value of liability

fair value option must be elected at the time of

issuance/origination

changes in fair value will be reported on the

income statement as gain/loss

credit in fair value adjustment account…carrying value

increases

is issuing debt or bond what type of activity

financing

is purchasing bond or stock of another firm what type of activity

investing