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23 Cards in this Set
- Front
- Back
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capital structure
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the mixture of debt and equity a company uses to finance its operations
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advantages of bonds
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1. stockholders maintain control
2. interest expense is tax-deductible 3. impact on earnings is positive |
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disadvantages of bonds
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1. risk of bankruptcy
2. negative impact on cash flows |
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bond principal (aka par value, face amount, and maturity value)
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amount payable at the maturity of the bond and on which the peirodic cash interest payments are computed
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par value
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another name for bond principal, or the maturity amount of a bond
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face amount
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another name for bond principal, or the maturity amount of the bond
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stated rate
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rate of cash interest per period stated in the bond contract
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debenture
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an unsecured bond;n o assets are specifically pledged to guarantee repayment
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callable bond
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may be called for early retirement at the option of the issuer
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convertible bond
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may be converted to other securities of the issuer (usually common stock)
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indenture
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a bond contract that specifies the legal provisions of the bonds:
- maturity date - rate of interest - date of interest payments - conversion privileges |
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prospectus
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legal docujment given to potential bond investors:
- describes company, bonds, and how proceeds of bonds will be used |
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bond certificate
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the bond document that each bondholder receives
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trustee
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an independent party appointed to represent bondholders; makes sure issuing company has fulfilled provisions of bond indenture
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coupon rate
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the stated rate of interest on bonds
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market interest rate
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also called YIELD or EFFECTIVE-INTEREST RATE: interest rate demanded by creditors.
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bond premium
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the difference between selling price and par when the bond is sold for MORE than par
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bond discount
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the difference between selling price and par whent he bond is sold for LESS than par
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Times Interest Earned Ratio
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Net Income + Interest Expense + Income Tax Expense / Interest Expense
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interest expense is reported as...
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a deduction from "operating income" on the income statement
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times interest ratio shows...
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the amount of resources generated for each dollar of interest expense
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straight-line amortization
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allocates an equal dollar mount to each interest period
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effective interest amortization
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step 1: compute interest expense:
unpaid balance X effective - interest rate X n/12 Step 2: compute amortization amount - interest rate - cash interest |
