Chapter 14

off balance sheet financing

acquisition of assets by agreeing to liabilities not reported on the balance sheet

effective interest method

allocates interest expense over the bond life to yield a constant rate of interest; interest expense for a period is found by multiplying the balance of the liability at the beginning of the period by the bond market rate at issuance; also called interest method

par value of a bond

amount the bond issuer agrees to pay at maturity and the amount on which cash interest payments are based; also called face amount or face value of a bond

unsecured bonds

bonds backed only by the issuer's credit standing; almost always riskier than secured bonds; also called debentures

serial bonds

bonds consisting of separate amounts that mature at different dates

bearer bonds

bonds made payable to whoever holds them; also called unregistered bonds

registered bonds

bonds owned by investors whose names and addresses are recorded by the issuer; interest payments are made to the registered owners

term bonds

bonds scheduled for payment (maturity) at a single specified date

convertible bonds

bonds that bondholders can exchange for a set number of the issuer's shares

callable bonds

bonds that give the issuer the option to retire them at a stated amount prior to maturity

secured bond

bonds that have specific assets of the issuer pledged as collateral

sinking fund bonds

bonds that require the issuer to make deposits to a separate account ; bondholders are repaid at maturity from that account

coupon bonds

bonds with interest coupons attached to their certificates; bondholders detach coupons when they mature and present them to a bank or broker for collection

bond indenture

contract between the bond issuer and the bondholders; identifies the parties rights and obligations

lease

contract specifying the rental of property

pension plan

contractual agreement between an employer and its employees for the employer to provide benefits to employees after they retired; expensed when incurred

debt to equity ratio

defined as total liabilities divided by total equity; shows the proportion of a company financed by non-owners (creditors) in comparison with that financed by owners

premium on bond

difference between a bond's par value and its higher carrying value; occurs when the contract rate is higher than the market rate; also called bond premium

discount on bonds payable

difference between a bond's par value and its lowers issue price or carrying value; occurs when the contract rate is less than the market price

bond certificate

document containing bond specifics such as issuer's name, bond par value, contract interest rate, and maturity date

contract rate

interest rate specified in a bond indenture (or note); multiplied by the par value to determine the interest paid each period; also called coupon rate, stated rate, or nominal rate

market rate

interest rate that borrowers are willing to pay and lenders are willing to accept for a specific lending agreement given the borrower's risk level

mortgage

legal loan agreement that protects a lender by giving the lender the right to be paid from the cash proceeds from the sale of a borrower's assets identified in the mortgage

installment note

liability requiring a series of periodic payments to the lender

capital leases

long term leases in which the lessor transfers substantially all risk and rewards of ownership to the lessee

straight line bond amortization

method allocating an equal amount of bond interest expense to each period of the bond life

carrying value of bonds

net amount at which bonds are reported on the balance sheet; equals the par value of the bonds less any unamortized discount or plus any unamortized premium; also called carrying amount or book value

fair value option

reporting option that permits a company to use fair value in reporting certain assets and liabilities, which is presently based on a 3-level system to determined fair value

annuity

series of equal payments at equal intervals

operating leases

short-term (or cancelable) leases in which the lessor retains risks and rewards of ownership

bond

written promise to pay the bond's par (or face) value and interest at a stated contract rate; often issued in denominations of $1,000