Accounting Chapter 15.1
Three factors for determining the current market price of a bond.
1. Dollar amounts to be received 2. Length of time until the amounts are received 3. Market rate of interest
________1. Mortgage bonds and sinking fund bonds are both examples of debenture bonds. ________2. Convertible bonds are also known as callable bonds. ________3. The market rate is the rate investors demand for loaning funds. ________4. Annual interest on bonds is equal to the face value times the stated rate. ________5. The present value of a bond is the value at which it should sell in the market.
1. False, Mortgage bonds and sinking fund bonds are both examples of secured bonds 2. False, they are two separate types of bonds 3. True 4. True 5. False, because money changes overtime
What type of information does a bond certificate provide?
1. Issuer of bonds 2. Maturity Date 3. Contractual interest rate 4. Face or par value
Bonds represents a promise to pay _________
1. Sum of money at designated maturity date 2. Periodic interest at a contractual (stated) rate on the maturity amount (face value)
State whether each of the following statements is true or false. ________1.Mortgage bonds and sinking fund bonds are both examples of secured bonds. ________2.Unsecured bonds are also known as debenture bonds. ________3.The stated rate is the rate investors demand for loaning funds. ________4.The face value is the amount of principal the issuing company must pay at the maturity date. ________5.The market price of a bond is equal to its maturity value.
1. True 2. True 3. False (The stated rate is the contractual interest rate used to determine the amount of cash interest the borrower pays.) 4. True 5. False (The market price of a bond is the value at which it should sell in the marketplace. As a result, the market price of the bond and its maturity value are often different.)
True or False 1. Bonds are a form of interest-bearing notes payable. 2. Secured bonds have specific assets of the issuer pledged as collateral for the bonds. 3. Secured bonds are also known as debenture bonds. 4. A conversion feature may be added to bonds to make them more attractive to bond buyers. 5. The rate used to determine the amount of cash interest the borrower pays is called the stated rate. 6. Bond prices are usually quoted as a percentage of the face value of the bond. 7. The present value of a bond is the value at which it should sell in the marketplace.
1. True 2. True 3. False, unsecured bonds are also known as debenture bonds 4. True 5. True 6. True 7. True
What must the board of directors stipulate for bonds?
1. number of bonds to be authorized 2. total face value 3. contractual interest rate
Callable Bonds
A bond that can be paid back by the issuer before the maturity date.
Secured Bonds
A bond with specific assets of the issuer pledged as collateral for the bonds.
Bonds
A form of interest-bearing notes payable issued by corporations, universities, and governmental agencies
Bond Certificate
A legal document that indicates the name of the issuer, the face value of the bonds, the contractual interest rate, and maturity date of the bonds.
bondholder
A person who buys the bonds
Face value
Amount of principal due at the maturity date of the bond
Unsecured bonds
Bonds issued against the general credit of the borrower. Also called unsecured bonds.
Convertible Bonds
Bonds that permit bondholders to convert them into common stock at the bondholders' option.
Two ways to raise capital in a business
Debt and Equity
True of False? A corporation issuing bonds is investing in bonds
False A corporation issuing bonds is borrowing money
True or False? Bonds can't be sold in small denominations, just like common stock
False Bonds can be sold in small denominations, just like common stock. Because of this, they attract many investors
True or False? Interest payments are usually made annually.
False Interest payments are usually made semi-annually.
True or False The contractual rate is stated as a semi-annual rate.
False It's stated as an annual rate
Examples of secured bonds
Mortgage bond - a bond secured by real estate. sinking fund bond - Bonds secured by specific assets set aside to redeem them.
Let's say that you have a zero-interest bond with a face value of $1,000,000 due in 20 years. For this bond, the cash you receive is a million dollars at the end of 20 years. Is it a good idea to pay $1,000,000 dollars for this bond?
No, A million dollars received 20 years from now is not the same as a million dollars received today. (inflation)
Contractual Interest Rate
Rate used to determine the amount of cash interest the borrower pays and the investor receives. (Also known as stated rate)
Who (whom) must approve bond issues?
The board of directors and stockholders
Maturity Date
The date on which the final payment on the bond is due from the bond issuer to the investor.
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)
True or False? A person who buys the bonds (bondholder) is investing in bonds
True
True or False? If you had $1 million today, and invest it. You will earn interest such that at the end of 20 years, and you would have much more than a million dollars.
True
True or False? State laws grant corporations the power to issue bonds
True
Bonds
a form of interest-bearing notes
bond identure
bond terms set forth in a legal document
Debt
borrowing money (bond)
Companies with good _____ use unsecured bonds extensively
credit ratings
Unsecured bonds are also called ______
debenture bonds
trustee
keeps records of each bondholder, maintains custody of unissued bonds, and holds conditional title to pledged property
Long-term liabilities
obligations that are expected to be paid after one year
Equity
selling shares of itself (stock)
What do bond indentures usually show?
shows the terms and summarizes the rights of the bondholders and their trustees, as well as the obligations of the issuing company.
Market Interest Rate
the rate investors demand for loaning funds.