Chapter 14 - Bonds and Long-Term Notes

mortgage bond

backed by a lien on specified real estate owned by the issuer; less risky than debentures, lower interest rate

coupon bonds

name of the owner was not registered; the holder actually clipped an attached coupon and redeemed it in accordance with instructions on the indenture

disclosure notes should include

nature of the company liabilities, interest rates, maturity dates, call provisions, conversion options, restrictions by creditors, assets pledged as collateral

times interest earned ratio

net income + interest expense + tax expense / interest expense

rate of return on shareholders equity

net income / shareholder's equity

rate of return on assets

net income / total assets

subordinated debenture

not entitled to receive any liquidation payment until the claims of other specified debt issues are satisfied

bond

obligation of an issuing corporation to repay a stated amount at a specified maturity date and to pay interest to bondholders between the issue date and maturity

zero-coupon bond

pays no interest, instead offers a return in the form of a "deep discount"

the higher the debt to equity ratio

the higher the risk

default risk

the likelihood a company will default on its obligations

discount

when bonds are sold for less than the face amount

premium

when bonds are sold for more than the face amount

bond indenture

a document that describes specific promises made to bondholders

callable bonds

bonds that allow the issuing company to buy back, or call, outstanding bonds from the bondholders before their scheduled maturity dateq

sinking fund debentures

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

debt to equity ratio

measures the degree of default risk; total lrateiabilities/shareholder's equity

serial bonds

more structured (and less popular) way to retire bonds on a piecemeal basis; retired in installments during all or part of the life of the issue

call price

price at which callable bonds are retired early

debt issue costs

recorded separately and amortized over the term of the related debt; GAAP requires a debit to an asset account - debt issue costs; amount is deducted from cash received

redemption of bond

repayment of principal

convertible bonds

retired as a consequence of bondholders choosing to convert them into shares of stock

debenture bond

secured only by the "full faith and credit" of the issuing corporationg