Chapter 14 Bonds and Long Term Notes

Bond Indenture

A document that describes specific promises made to bondholders.

Bonds

A form of debt consisting of separable units (bonds) that obligates the issuing corporation to repay a stated amount at a specified maturity date and to pay interest to bondholders between the issue date and maturity.

Callable

Allows the issuing company to buy back, or call, outstanding bonds from the bondholders before their scheduled maturity date.

Long-term Liabilities

Are liabilities that are NOT current, which means that they are not expected to be paid with current assets or be replaced with other current liabilities.

Long-term Liabilities

Are obligations whose due date is greater than one-year or are expected to be paid iwth non-current assets, other non-current liabilities, or equity.

Discount

Arises when bonds are sold for less than face amount.

Premium

Arises when bonds are sold for more than face amount.

Mortgage Bond

Backed by a lien on a specified real estate owned by the issuer.

Convertible Bonds

Bonds for which bondholders have the option to convert the bonds into shares of stock.

Sinking Fund Debentures

Bonds that must be redeemed on a prespecified year-by-year basis; administered by a trustee who repurchases bonds in the open market.

Effective Interest Method

Calculates interest revenue as the market rate of interest multiplied by the outstanding balance of the investment.

Early Extinguishment of Debt

Debt is retired prior to its scheduled maturity date.

Periodic interest

Is the effective interest rate times the amount of the debt outstanding during the interest period.

Implicit Rate of Interest

Rate implicit in the agreement.

Serial Bonds

More structured (and less popular) way to retire bonds on a piecemeal basis.

Coupon Bonds

Name of the owner was not registered; the holder actually clipped an attached coupon and redeemed it in accordance with instructions on the indenture.

Debenture Bond

Secured only by the "full faith and credit" of the issuing corporation.

Subordinated Debenture

The holder is not entitled to receive any liquidation payments until the claims of other specified debt issues are satisfied.

Ans. True

True or False: A basic concept of accounting is substance over form.

Ans. True

True or False: Other things being equal, the lower the perceived riskiness of the corporation issuing bonds, the higher the price those bonds will command.

Ans. True

True or False: The reason the stated rate often differs from the market rate, resulting in a discount or premium, is the inevitable delay between the date the terms of the issue are established and the date the issue comes to market.

Debt Issue Cost

With either publicly or privately sold debt, the issuing company will incur costs in connection with issuing bonds or notes, such as legal and accounting fees and printing costs, in addition to registration and underwriting fees.