chapter 14

trustee

an individual person or member of a board given control or powers of administration of property in trust with a legal obligation to administer it solely for the purposes specified

effective interest method

application of the accrual concept, recording interest each period as the effective market rate of interest multiplied by the outstanding balance of the debt

mortgage bonds

backed by a lien on specific real estate owned by the issuer -considered less risky, typically commands a lower interest rate

coupon bonds

bearer bonds, the name of the owner is not registered, and to collect interest on the bond the holder clipped the coupon and redeemed it for the money

serial bonds

bond issue in which a portion of the outstanding bonds matures at regular intervals until eventually all of the bonds have matured

registered bonds

bond whose owner is registered with the bond's issuerThe owner's name and contact information is recorded and kept on file with the company, allowing it to pay the bond's coupon payment to the appropriate person. If the bond is in physical form, the owner's name is printed on the certificate.

term bonds

bonds from the same issue that share the same maturity dates. they have a call feature

debt restructuring

new arrangement after changing the original terms of an agreement motivated by financial difficulties

subordinate debenture

not entitled to receive any liquidation payments until the claims of other specified debt issues are satisfied -is an exception in the case of bankruptcy

bonds

obligate the issuing corporation to repay a stated amount at a specified maturity date

zero coupon bonds

pays no interest, offers return in the from of a deep discount from the face amount -advantage: the corporation can deduct for tax purposes

straight line method

plug figure for interest expense and revenue -materiality concept

implicit rate of interest

the rate implicit in the agreement

default risk

type of risk the debt to equity ratio measures

junk bonds

a high-yield, high-risk security, typically issued by a company seeking to raise capital quickly in order to finance a takeover

sinking fund debentures

a means of repaying funds that were borrowed through a bond issue. The issuer makes periodic payments to a trustee who retires part of the issue by purchasing the bonds in the open market.

prospectus

a printed document that advertises or describes a school, commercial enterprise, forthcoming book, etc., in order to attract or inform clients, members, buyers, or investors. example: brochure

early extinguishment of debt

When debt of any type is retired prior to its schedule maturity date

redeemable bonds

bonds that can be paid off by the issuer prior to the bonds' maturity date.

sinking fund

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

convertible bonds

can be exchanged for shares of stock at the option of the bondholder

private placement

choosing to sell debt securities directly to a single investor often a pension fund or an insurance company -not subject to the costly and lengthy legal process of registering with the SEC

debt issue costs

costs in connection with issuing bonds or notes, like legal costs and accounting fees or printing costs -recorded separately and are amortized over the term of the related debt

bond indenture

describes the specific promises made to bondholders -held by a trustee.. usually a bank or financial institution, appointed by the issuing firm to represent the rights of the bondholders -legal action could take place if the company fails to live up to terms

detachable stock purchase warrant

gives the investor an option to purchase a stated number of shares of common stock at a specific option price, often within a given period of time -excerised separately then a bond though

accrued interest

interest accrued since last payment date

discount

less than face amount

premium

more than face amount

debenture bonds

most corporate bonds, secured only by the full faith and credit of the issuing corporation, no specific assets are pledged as security

callable bonds

redeemeble... allowing the company to buy back or call outstanding bonds from bondholders before their scheduled maturity date -allows a company to have protection against being stuck with relatively high cost debt in the event interest rates fall during the period before maturity