Chapter 10
debt-to-equity ratio
a measure to assess the risk of a company's financing structure total liabilities/total equity less stable=lower ratio
Par Value of a Bond
also known as the face amount. is paid at a specified future date known as the bonds maturity date.
registered bonds
bonds issued in the names and addresses of their holders
What happens after bonds are issued
bought and sold by investors. Any particular bond probably has a number of owners before it matures.
convertible bonds
can be exchanged for a fixed number of shares of the issuing corporations common stock. offers holders the potential to participate in future increases in stock price
Bond Retirement at maturity
carrying value of bonds = par value. Dr. Bonds Payable Cr. Cash
What rates determine bond price?
contract rate and market rate
callable bonds
have an option by the issuer to retire them at stated dollar amount before maturity,
Secured bonds
have specific assets of the issuer pledged as collateral.
Bond Retirement by Conversion
holders of convertible bonds have the right to convert their bonds to stock.. the bonds carrying value is transferred to equity accounts and no gain or loss is recorded
installment note
is an obligation requiring a series of payments to the lender. common for franchises and other businesses. **payments are spread over several periods
Market Rate of Interest
is the rate that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level
Call Option
issuer can reserve the right to reserve bonds early by issuing callable bonds. -the bond indenture can give the issuer the option to call the bonds before they mature by paying the par value plus a call premium to bondholders.
Mortgage Contract
legal document describing mortgage terms
Mortgage
legal document that helps protect a lender if borrower fails to make required payments on notes or bonds. gives the lender a right to be paid from the cash proceeds of the sale of a borrowers assets identified with in it
serial bonds
mature at more than one date often in series
Bond Certificate
paper issued to bondholder stating issuer and bond information
Collateral agreements
reduce the loss for bonds and notes
sinking fund bonds
require the issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds.
Term bonds
scheduled for maturity on a specific date
Amortizing a bond discount
systematically reducing a bond discount to zero over its life
Purchase bond on open market
the issuer retires bonds by repurchasing them on the open market at their current price
Bond
the issuers written promise to pay an amount identified as the par value of the bond with interest.
Bond indenture
the legal document identifying the rights and obligations of both the bond holders and the issuer serves as the legal contract between the issuer and bondholder
Authorization of bond issuances includes
the number of bonds authorized their par value the contractual interest rate
As a bond risk level increases what happens?
the rate increases to compensate purchasers for the bonds
bearer bonds
unregistered bonds, bonds payable to whoever holds them **coupon bonds
Unsecured bonds
(debentures) are backed up by the issuers general credit standing, Risky because creditors can lose all or a portion of their balances.
Installment note journal entry
(signs a 8% ISN requiring 6 annual payments of principal plus interest) Dr. Cash 60,000 Cr. Notes Payable 60,000
Straight line bond amortization method
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Disadvantage on Bonds
1. Bonds can decrease return on equity 2.Bonds require payment on both periodic interest and the par value at maturity.
Advantages of Bonds
1. Bonds do not affect owner control 2. Interest on bonds is tax deductible 3. Bonds can increase return on equity
Bond Retirement before Maturity
1. call option 2. purchase them on open market
Conversion Journal Entry
Dr. Bonds Payable 100,000 Cr. Common Stock 30,000 Cr. Paid in capital in excess of par value 70,000
to record bonds before maturity
Dr. Bonds Payable 100,000 Dr. Premium on Bonds Payable 4500 Cr. Gain on Bond Retirement 1500 Cr. Cash 103,000
to record installment payments
Dr. Interest Expense 4800 Dr. Notes Payable 8179 Cr. Cash 12,979
the amount of interest paid is determined by?
Multiplying the par value of the bond by the bonds contract rate of interest for that same period