Accounting Exam 4 Chapter 10
earnings before interest and taxes
EBIT stands for
effective interest rate method
a more accurate recognition pattern can be accomplished by using an approach called the
mortgage bond
a type of secured bond which conditionally transfers the title of designated property to the bondholder until the bond is paid
callable bonds
allow the issuing company to redeem (pay off) the bond debt before the maturity date
market conditions
are influenced by many factors such as the state of the economy, government policy, and the law of supply and demand
unsecured bonds
are issued based on the general strength of the borrower's credit
lower
bond interest rates may be __ than bank interest rates
high
bond issuers try to maintain __ credit ratings because lower ratings require them to pay higher interest rates
financial leverage
bonds may provide companies increased earnings through
20 year
bonds normally have ___ long terms to maturity
carrying value
book value
discount on bonds payable
contra account for bonds payable
bond certificates
describe a company's obligation to pay interest and to repay the principal
line of credit
enables a company to borrow or repay funds as needed
secured bonds
grant their holders a priority legal claim on specified identifiable assets should the issuer default
lower
higher times interest earned ratios suggest __ level of risk
subordinated debentures
holders of __ have lower priority claims than other creditors
unsubordinated debentures
holders of ___ have equal claims
more
large loans with long terms to maturity pose more risk to lenders than small loans with short terms
convertible bonds
liabilities that can be exchanged at the option of the bond holder for common stock or some other specified ownership interest
one year
lines of credit typically have __ terms
installment notes
loans that require payments of principal and interest at regular intervals are typically represented by
sinking fund
managed by an independent trustee who invests the funds until the bonds mature
bond certificates
many companies borrow money directly from the public by selling
serial bonds
mature at specified intervals throughout the life of the total issue
term bonds
mature on a specified date in the future
stated interest rate
most bonds require the issuer to make cash interest payments based on a ___ at regular intervals over the life of the bond
call price
normally exceeds the face value of the bonds
amortization
repaying a portion of the principal with regular payments that also include interest is often called loan ___
restrictive covenants
restrict additional borrowing, limit dividend payments, or restrict salary increases
premium on bonds payable
separate liability account for premiums is called
the market rate of interest
since the effective interest rate is based on the market price of the bonds on the day of issue, it is sometimes called
effective interest rate
the actual rate of interest one must pay is
face value
the amount due at maturity is the __ of the bond
bondholder
the buyer of a bond, or __, is the lender
subtracted
the contra account is __ from the face value to determine the carrying value of the bond liability
call premium
the difference between the call price and the face value is commonly called
market interest rate
the effective rate of interest investors are willing to accept for a particular bond equals the
issuer
the seller, or ___, of a bond is the borrower
two to five years
the terms of installment notes usually range from
Fitch, Moody's, and Standard and Poor's
the three financial services that analyze the risk of default for corporate bond issues and publish ratings of the risk
times interest earned ratio
this ratio measures how may times a company would be able to pay its interest using its earnings
EBIT/ interest expense
times interest earned ratio
sinking fund
to ensure there is enough cash available at maturity to pay off the debt, a bond agreement may require the issuer to make regular payments into a ____
collateral
to reduce the risk that they won't get paid, lenders frequently require borrowers to pledge designated assets as __ for loans
debentures
unsecured bonds are also called
bond discount
when bonds are sold for less than their face value
bond premium
when bonds are sold for more than their face value
discount
when the market rate of interest is higher than the stated rate of interest, bonds will sell at a __
premium
when the market rate of interest is lower than the stated rate of interest, bonds will sell at a __