Accounting Chapter 14

Front 1

Bearer bond

Back 1

A bond that is payable to the bearer or person wh o has physical possession of the bond.

Front 2

Bond

Back 2

A long-term debt instrument issued by corporations to raise money from the public.

Front 3

Bond certificate

Back 3

The note given to bondholders.

Front 4

Bond indenture

Back 4

The bond contract

Front 5

Bond issue

Back 5

A group of bonds.

Front 6

Callable bond

Back 6

A bond that gives t he company issuing the bond thre right to buy it back before the maturity date at a specified price.

Front 7

Capital lease

Back 7

A lease in which a company acquires such a substantial interest in th e leased property that the lessee company owns the asset.

Front 8

Carrying value of debt

Back 8

Remaining liability on the pro forma balance sheet.

Front 9

Collateral

Back 9

An asset or group of assets specifially named in a debt agreement to which the creditor has claim if the borrower fails to comply with the terms of the note.

Front 10

Convertible bond

Back 10

A bond feature that allows bondholders to exchange the bonds for common or preferred stock.

Front 11

Covenants

Back 11

Restrictions that lenders place on the borrowing company to protect the lender's interest.

Front 12

Debenture bonds

Back 12

Unsecured bond; bonds with no specific assets pledged as collateral.

Front 13

Discount on a note

Back 13

The excess of the face value of a note over its present value (cash proceeds).

Front 14

Face rate on the note

Back 14

Used to determine the cash interest the borrower pays.

Front 15

Face value of the note

Back 15

The amount the borrower will repay the lender for principal.

Front 16

Holder of the note

Back 16

The lender

Front 17

Lease

Back 17

An agreement to convey the use of a tangible asset from one party to another in return for rental payments.

Front 18

Lump-sum payment note

Back 18

A debt instrument that contains a promise to pay a specific amount of money at the end of a specified period of time.

Front 19

Maker of the note

Back 19

The borrower.

Front 20

Market, or effective, interest rate

Back 20

The actual interest rate charged on a note's proceeds.

Front 21

Mortgage

Back 21

A long-term note secured with real estate, such as land or buildings, as collateral.

Front 22

Mortgage bond

Back 22

A bond that is secured with real estate.

Front 23

Operating lease

Back 23

A rental agreement for a period of time substantially shorter tthan the economic life of the leased asset.

Front 24

Periodic payment and lump-sum note

Back 24

A debt instrument that combines periodic payments and a final lump-sum payment.

Front 25

Periodic payment note

Back 25

A debt instrument that contains a promise to make a series of equal payments consisting of both interest and principal at equal time intervals over a specified time period.

Front 26

Premium on a note

Back 26

The amount that the present value (cash proceeds)of a note exceeds its face value of the note.

Front 27

Proceeds of the note

Back 27

The amount of cash raised from issuance of a note.

Front 28

Registered bonds

Back 28

Bonds that are numbered and made payable in the name of the bonholder.

Front 29

Secured bond

Back 29

A bond that has some part of the issuing corporation's assets serving as security for the loan.

Front 30

Serial bond

Back 30

A bond issue that has specified portions of the bond issue coming due periodically over the life of the bond issue.

Front 31

Subordinated bonds

Back 31

Unsecured bonds whose rights to repayment are ranked after, or subordinated to, some other person or group of creditors.

Front 32

Unsecured bond

Back 32

A bond that does not have any specific assets pledged as security against its repayment.

Front 33

Key points for Periodic Payment (installment) Notes:

Back 33

The initial CV = proceeds = PV = Face value 2) The Face rate of interest = market rate of interest. 3) The futre value of the note is zero because we are paying back the face value of the note over its life. 4) Interest expense for a period: CV x market rate x 1/c. 5) Payments are for interest and principal (face value) each period. 6) the CV decreases over time as the principal is paid off.

Front 34

Key points for Lump-sum (noninterest-bearing) notes:

Back 34

The initial CV = proceeds = PV. 2) There is no face rate of interest, only a market rate. 3) There are no periodic payments. 4) The future value = face value of the note. 5) Interest expense for a period: CV x market rate x 1/c. 6) The CV increases over time as interest expense (not paid) is added to the CV.

Front 35

Key points for Periodic and Lump-sum payment (Bonds) notes when market rate > face rate:

Back 35

Initial CV = proceeds = present value. 2) The payment (ANN) = face value x face rate x 1/c. 3) Face value of the note = future value. 4) Interest expense: CV x market rate x1/c. 5) The difference between the interest expense on the income statement and the interest payment on the statement of cash flows is the adjustment to the CV on the balance sheet. 6) The CV increases as the adjustment is added to CV.

Front 36

Key points for Perriodic and lump-sum payment (bonds) notes when market rate < face rate.

Back 36

Initial CV = proceeds = present value. 2) The payment (ANN) = face value x face rate x 1/c. 3) Face value of the note = future value. 4) Interest expense for a period: CV x market rate x 1/c. 5) The difference between the interest expense on income statement and interest payment on cash flows is the adjustment to the CV on balance sheet. 6) The CV decreases as adjustment is deducted from CV.