Key Concepts in Debt Financing and Bonds

Amortization schedule

Provides a table format detailing the cash payment each period, the portions of each cash payment that represents interest and the change in carrying value, and balance of the carrying value.

Annuity

Cash payments of equal amounts over equal time periods.

Bond

A formal debt instrument issued by a company to borrow money. The issuing company (borrower) is obligated to pay back to the investor (lender): (1) a stated amount, referred to as the principal or face amount, at a specified maturity date and (2) periodic interest payments over the life of the bond.

Callable

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

Capital structure

The mixture of liabilities and stockholders' equity in a business.

Carrying value

The amount for which a liability is reported in the balance sheet.

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

Borrowing money from creditors (liabilities).

Debt to equity ratio

Total liabilities divided by total stockholders' equity; measures a company's risk.

Default risk

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

Discount

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

Early extinguishment of debt

The issuer retires debt before its scheduled maturity date.

Equity financing

Obtaining investment from stockholders (stockholders' equity).

Installment payment

Includes both an amount that represents interest and an amount that represents a reduction of the carrying value.

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

An implied rate based on the price investors are willing to pay to purchase a bond in return for the right to receive the face amount at maturity and periodic interest payments over the remaining life of the bond.

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 divided by average total assets; measures the amount of net income generated for each dollar invested in assets.

Secured bonds

Bonds that are supported by specific assets pledged as collateral.

Serial bonds

Bonds that require payment of the principal 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.

Solvency

Refers to a company's ability to pay its current and long-term obligations.

Stated interest rate

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

Term bonds

Bonds that require payment of the full principal amount at a single maturity date.

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.