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 __