Accounting- Chapter 9

Lease

contractual arrangement by which the lessor (owner) provides the lessee (user) the right to use an asset for a specified period of time.

Bonds are usually issued to ___ while notes are often issued to a ____

many lenders; single lender (ex. Bank)

return on equity

net income divided by average stockholders equity; measures the income generated per dollar of equity.

Debt financing

obtaining additional funding from lenders

Equity financing

obtaining additional investment from stockholders. (stockholders' equity)

Amortization Schedule

provides a summary of the cash paid, interest expense, and changes in carrying value for each semiannual interest period

Market interest rate

represents the true interest rate used by investors to value a bond

Early extinguishment of debt

retirement of debt before its scheduled maturity

Debt to equity ratio

1. A measure of financial leverage 2. Total liabilities/stockholders equity

Serial bonds

Bond issue matures in installments

Term bonds

Bond issue matures on a single date; require payment of the full principal amount of the bond at the end of the loan term

Most common form of corporate debt

Bonds

Secured bonds

Bonds are backed by collateral (protection for a lender against a borrower's default).

Callable bonds

"redeemable"; allows the borrower to repay the bonds before their scheduled maturity date at a specified call price, usually at an amount just above face value

Three larges bond underwriters (sold) are

JPMorgan, Chase, Citigroup, and Bank of America

Convertible bonds

Lender (investor) can convert bonds to common stock.

Carrying value

The balance in the bonds payable account, which equals face value of bonds payable minus the discount or the face value plus the premium

Annuity

cash payments of equal amounts over equal time periods

Stated interest rate

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

Operating lease

(recorded like a rental) The lessor owns the asset, and the lessee simply uses the asset temporarily. Over the lease term, the lessee records rent expense and the lessor records rent revenue.

Measuring a company's risk includes

debt to equity and times interest earned

Bonds issued at premium

if the bonds' stated interest rate is more than the market interest rate, the bonds will issue above face amount

Installment payment

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

Private Placement

selling debt securities (negotiable or tradeable liability or loan) directly to a single investor

Retired

buy back of bonds from the investors

Bonds issued at Discount, Face amount, at a premium

Discount: Stated interest rate < Market interest rate Face amount: Stated interest rate= Market interest rate Premium: Stated interest rate > Market interest rate

Bonds issued at face amount

If the bonds' stated interest rate equals the market interest rate

Bonds issued at discount

If the bonds' stated interest rate is less than the market interest rate, then the bonds will issue below face amount

Capital Lease

The lessee essentially buys an asset and borrows the money through a lease to pay for the asset.

Sinking fund

a designated fund to which an organization makes payments each year over the life of its outstanding debt.

Define Bond

a formal debt instrument that obligates the borrower to repay a stated amount, referred to as the principal or face amount, at a specified maturity date.

Callable bonds protect the borrower

against future decreases in interest rates

Three primary sources of long-term debt financing

bonds, notes, and leases

Unsecured bonds (debentures)

Bonds are not backed by collateral (specific asset). These bonds are secured only by the "full faith and credit" of the borrower

Times interest Earned Ratio

1. Measures a company's ability to meet interest payments as they become due. 2. Net income+Interest Expense+Tax Expense/ Interest expense

return on assets

measures the amount of income generated for each dollar invested in assets. net income/ average total assets

Capital Structure

mixture of liabilities and stockholders' equity a business uses

Default risk

the risk that a company will be unable to pay the bonds face amount or interest payment as it becomes due