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