A201 Ch 9

callable

a bond feature that allows the borrower to repay the bonds before their scheduled maturity date at a specified call price most corporate bonds have this feature can be paid before maturity date above face value protect the borrower against future decreases in interest rate; if interest rates decline, borrower can buy back high-interest rate bonds at fixed price and issue new bonds at new, lower interest rates

101

a bond is issued at _ if it sells for 101% of its face value

discount on bonds payable

Interest expense (issue price x half the effective rate) - cash interest paid (face value x half the stated rate) = the discount "amount" recorded in the _ _ _ _ account Occurs when a bond's issue price is less than face value.

issue price of bond

Present value of principal + present value of interest payments The present value of the face amount + the present value of the periodic interest payments need: -face amount of bonds -number of periods to maturity -interest payment each period -market interest rate per period present value of principal is what is recognized as a liability on the date of issue

fair value option

Reporting option permitting company to use fair value in reporting certain assets and liabilities, which is presently based on 3-level system to determine fair value reports market value

lease

a contractual arrangement by which the lessor provides the lessee the right to use an asset for a specified period of time

annuity

a series of equal amounts over equal time periods

convertible

allow the lender (investor) to convert each bond into a specified number of shares of common stock a bond feature that allows the lender less common than a call feature require lower interest rates with a conversion feature

sinking fund

an investment fund to which an organization makes payments each year over the life of its outstanding debt used to set aside money to be used to pay debts as they come due

carrying value

another name for the principal; the original amount of the loan face amount of a bond liability less any unamortized bond discount or plus any unamortized bond premium

bonds vs notes

bonds -usually lower interest rate -sometimes have costs exceeding 5% of the amount borrowed loans -for small loans, additional bond issuance costs exceed savings from a lower interest rate -for large loans, the interest rate savings exceed the additional bond issuance costs, making bonds more attractive

face amount, discount

bonds frequently are not issued at _ _ because the market interest rate has to be estimated. Instead they are commonly issued at a _

discount

bonds issued below face amount a bond's issue price is below the face amount will be issued at a _ when the market rate of interest is greater than the stated rate

secured bonds

bonds supported by specific assets pledged as collateral

long-term liabilities

bonds, leases

three primary sources of long-term debt financing

bonds, notes, leases

debt financing

borrowing money from creditors obtaining additional funding from lenders these funds are liabilities, often classified as notes payable

amortization payments

calculate interest expense as the carrying value times the market rate Ex. 0.06 x 1/12 (one month) = 0.5% per month the difference between the cash paid and interest expense each month equals the decrease in carrying value finally, prior carrying value less the decrease in carrying value equals the new balance in carrying value

two ratios to assess financial risk

debt to equity ratio times interest earned

future value

face is paid in the future, so in calculating the issue price of bonds use the _ _ of the face value

bond

formal debt instrument that obligates the borrower to repay a stated amount at a specified maturity date very similar to notes, but are issued to many lenders rather than a single lender (the bank) like notes are -obligate issuing company to pay a specific amount -obligate the issuing company to repay the bonds at a specific date

external financing

funds coming from those outside the company

long-term debt

in order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's _-_ _

installment payment

includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance

tax-deductible

interest expense incurred when borrowing money is _-_, whereas dividends paid to stockholders are NOT _-_

market value and market interest rates

inversely related when market interest goes up, market value goes down, and vice versa

underwritten

issuing company pays a fee for the underwriting services the investment bank guarantees a price to the issuing firm, no matter what price the securities are sold for

most popular method of external financing

leasing

capital structure

mixture of liabilities and stockholders' equity a business uses

equity financing

obtaining investment from stockholders obtaining additional funding from stockholders these fund go into stockholders' equity

capital lease

occur when the lessee essentially buys an asset and borrows the money through a lease to pay for the asset the amount of the lease is added to both assets and liabilities to recognize the purchase of an asset and the incurrence of an additional lease liability

lessor

owner

internal financing

profits generated by the company are a primary source of this

amortization schedule

provides a summary of the cash paid, interest expense, and decrease in carrying value for each monthly payment

times interest earned

ratio that compares interest expense with income available to pay those charges (Net Income + Interest Expense + Income Tax Expense) / Interest Expense

default risk

refers to the possibility that a company will be unable to pay the bond's face amount or interest payments as they become due the risk that a company will be unable to pay the bond's face amount or interest payments as it becomes due

term bonds

require payment of the full principal amount of the bond at the end of the loan term

serial bonds

require payments in installments over a series of years

private placement

sale of debt securities directly to a single investor keeps the costs down of underwriting

higher, lower

the _ the market interest rate, the _ the bond issue price will be

stated interest rate

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

market interest rate

the true interest rate used by investors to value a bond issue is referred to as the _ _ _ represents the true interest rate used by investors to value the bond issue also known as the effective-interest rate or yield rate

debentures

unsecured bonds not backed by a specific asset; only backed by full faith and credit of borrower

lessee

user

half the interest rate

when calculating issue price, use _ _ _ _ to calculate it to account for the semiannual issuing

retired bonds

when the issuing corporation buys back its bonds from the investors when a corporation repurchases its bonds from the bondholders

common characteristics/provisions of bonds

-convertible -callable (more common than conversion) -secured or unsecured call and conversion features may be issued with a bond

advantages of leasing

-lower income taxes -reduces long-term debt -improves cash flows through up to 100% financing

two components for pricing a bond

-the interest payments -the repayment of the principal when pricing a bond, the present value of the annuity of the coupon payments is added to the present value of the maturity value of the bond

return on assets

= net income/average total assets

debt to equity ratio

= total liabilities/stockholders' equity

premium

A bond's issue price is above the face amount issued at _ when the market rate of interest is less than the stated rate

4, 14

A company issues some bonds that are 10% and semiannual due in 7 years. The market interest rate is 8%. To calculate the issue price of the bonds, the company should use an interest rate of _% and _ # of interest periods

operating lease

A contractual agreement allowing one party (the lessee) to use the asset of another party (the lessor); accounted for as a RENTAL by the lessee the lessor owns the asset, the lessee uses it temporarily avoids reporting long-term debt for lessee; lessor records rent revenue specifies that the rights and risks of ownership are retained by the lessor

convertible bond debt

IFRS: separate the issue price of convertible debt into its liability (bonds) and equity (conversion option) component according to IFRS, bond issue price is allocated between liabilities and stockholders' equity