Chapter 14 Bonds
Earnings per Share
(net income - preferred dividends) / average common shares outstanding
Convertible Bonds
Bonds that can be converted into common stock at the bondholder's option
Callable Bonds
Bonds that the issuing company can redeem (buy back) at a stated dollar amount prior to maturity
Redemption is only for
Callable Bonds
Carrying Value for Installment Notes
Carrying Value beginning of the year - Interest Expense
The interest rate to be paid at face amount of the bond
Contract Rate / Coupon Rate
Bond Indenture
Contract between the bond issuer and the bondholders; identifies the parties' rights and obligations.
Installment Note
Debt that requires the borrower to make equal periodic payments to the lender for the term of the note
The Difference between selling price and face amount
Discount / Premium on Bonds
Principal
Face amount of the bond
Carrying Value > Price for Redemption
Gain on Redemption of Bonds
Interest Expense for Installment Note
Interest Rate * Carrying amount
Bond
Interest-bearing note requiring periodic interest payments, with face amount repaid at maturity date
Carrying Value < Price for Redemption
Loss on Redemption of Bonds
The rate determined from sales and purchases of similar bonds
Market Rate / Effective Rate
When a note is secured by an asset, it is called
Mortgage note *If the borrower fails to pay a mortgage note, the lender has the right to take possession of the pledged asset and sell it to pay off the debt. Mortgage notes are typically issued by an individual bank.
Decrease in Notes Payable
Note Payment - Interest Expense
Each Payment for Installment Note
Payment of a portion of the amount initially borrowed, called the principal Payment of interest on the outstanding balance
Annual Payments for Installment Notes
Principal + Interest
Market Rate > Coupon Rate
Sale at Discount
Market Rate < Coupon Rate
Sale at Premium
Market Rate = Coupon Rate
Sale at face amount
Corporate Finance Sources
Short-term Debt: Accounts Payable Long-term Debt: Notes and Bonds Equity: Stock
When a corporation issues bonds, the proceeds received for the bonds depend on the following
The face amount of the bonds, which is the amount due at the maturity date The interest rate on the bonds The market rate of interest for similar bonds
Carrying Value of Bonds
The face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date
Serial Bonds
bonds mature over several dates
Term Bonds
bonds that all mature at the same time
Discount on Bonds Payable
contra account to bonds payable
When market rate changes
short-term bond fluctuates less