Chapter 10

Capital lease

A contractual agreement allowing one party (the lessee) to use the assets of another party (the lessor); accounted for like a debt-financed purchase by the lessee.

Bond certificate .

A legal document that indicates the name of the issuer, the face value of the bonds, and other data such as the contractual interest rate and the maturity date of the bonds

Unsecured bonds

Bonds issued against the general credit of the borrower.

Convertible bonds

Bonds that can be converted into common stock at the bondholder's option.

Secured bonds

Bonds that have specific assets of the issuer pledged as collateral.

Contingencies

Events with uncertain outcomes that may represent potential liabilities.

Long-term liabilities

Obligations that a company expects to pay more than one year in the future.

*Effective-interest rate

Rate established when bonds are issued that maintains a constant value for interest expense as a percentage of bond carrying value in each interest period.

Contractual (stated) interest rate

Rate used to determine the amount of interest the issuer pays and the investor receives.

Maturity date

The date on which the final payment on a bond is due from the bond issuer to the investor.

Off-balance-sheet financing

The intentional effort by a company to structure its financing arrangements so as to avoid showing liabilities on its balance sheet.

Present value

The value today of an amount to be received at some date in the future after taking into account current interest rates.

Operating lease

A contractual agreement allowing one party (the lessee) to use the asset of another party (the lessor); accounted for as a rental.

Current liability

A debt that a company reasonably expects to pay (1) from existing current assets or through the creation of other current liabilities, and (2) within one year or the operating cycle, whichever is longer.

Bonds

A form of interest-bearing notes payable issued by corporations, universities, and governmental agencies.

Mortgage note payable

A long-term note secured by a mortgage that pledges title to specific assets as security for the loan.

Times interest earned

A measure of a company's solvency, calculated by dividing the sum of net income, interest expense, and income tax expense by interest expense.

*Straight-line method of amortization

A method of amortizing bond discount or bond premium that allocates the same amount to interest expense in each interest period.

*Effective-interest method of amortization

A method of amortizing bond discount or bond premium that results in periodic interest expense equal to a constant percentage of the carrying value of the bonds.

Face value

Amount of principal due at the maturity date of the bond.

Notes payable

An obligation in the form of a written note.

Callable bonds Bonds that the issuing company can redeem (buy back) at a stated dollar amount prior to maturity.

Bonds that the issuing company can redeem (buy back) at a stated dollar amount prior to maturity.

Discount (on a bond) .

The difference between the face value of a bond and its selling price when a bond is sold for less than its face value

Premium (on a bond)

The difference between the selling price and the face value of a bond when a bond is sold for more than its face value.

Market interest rate

The rate investors demand for loaning funds to the corporation.

Time value of money

The relationship between time and money. A dollar received today is worth more than a dollar promised at some time in the future.