Chapter 9 - Long Term Liabilities

Amortization schedule

Provides a summary of the cash interest payments, interest expense, and changes in carry value for debt instruments.

Annuity

Cash payments of equal amounts over equal time periods.

Bond

A formal debt instrument that obligates the borrower to repay a stated amount, referred to as the principle or fact amount, at a specified maturity date.

Callable

A bond feature that allows the borrower to repay the bonds before their scheduled maturity date at a specified call price.

Capital lease

Contract in which the lessee essentially buys an asset and borrows the money through a lease to pay for the asset.

Capital structure

The mixture of liabilities and stockholder's equity in a business.

Carrying value

The balance in the bonds payable account, which equals the face value of bonds payable minus the discount or the face value plus the premium.

Convertible

A bond feature that allows the lender (or investor) to convert each bond into a specified number of shares of common stock.

Debt financing

Obtaining additional funding from lenders.

Debt to equity ratio

TOTAL LIABILITIES / STOCKHOLDER'S EQUITY. This measures a company's solvency risk.

Default risk

The risk that a company will be unable to pay the bond's face amount or interest payments as it becomes due.

Discount

A bond's issue price is below the face amount.

Early extinguishment of debt

The issuer retires debt before its scheduled maturity rate.

Equity financing

Obtaining additional funding from stockholders

Installment payment

Includes both an amount that represents interest and an amount that represents a reduction of the outstanding balance.

Lease

A contractual arrangement by which the lessor (owner) provides the lessee (user) the right to use an asset for a specified period of time.

Market interest rate

Represents the true interest rate used by investors to value a bond.

Operating lease

Contract in which the lessor owns the asset and the lessee simply uses the asset temporarily.

Premium

A bond's issue price is above the face amount.

Private placement

Sale of debt securities directly to a single investor.

Return on assets

NET INCOME / AVERAGE TOTAL ASSETS. Measures the amount of net income generated for each dollar invested in assets.

Return on equity

NET INCOME / AVERAGE STOCKHOLDER'S EQUITY. Measures the income generated per dollar of equity.

Secured bonds

Bonds that are supported by specific assets pledged as collateral

Serial bonds

Bonds that require payment of the principle amount of the bond over a series of maturity dates.

Sinking fund

An investment fund used to set aside money to be used to pay debts as they come due.

Stated interest rate

The rate quoted in the bond contract used to calculate the cash payments for interest.

Term bonds

Bonds that require payment of the full principle amount at the end of the loan term.

Times interest earned ratio

Ratio that compares interest expense with income available to pay those charges.

Unsecured bonds

Bonds that are not supported by specific assets pledged as collateral.