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15 Cards in this Set
- Front
- Back
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Bond |
It is issuer's written promise to pay an amount identified as the par value of the bond with interest. |
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Par value of a bond (face value or face amount) |
The par value of a bond is paid at a specified future date known as the bond's maturity date. |
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Advantages of bonds |
1. Bonds do not affect owner control. 2. Interest on bonds is tax deductible. 3. Bonds can increase return on equity when a company earns a higher return with the borrowed funds than it pays in interest. |
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Disadvantages of bonds |
1. Bonds can decrease return on equity when a company earns a lower return with the borrowed funds than it pays in interest. 2. Bonds require payment of both periodic interest and the par value at maturity.
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Bond indenture |
Bond indenture is the legal document identifying the rights and obligations of both the bondholders and the issuer. |
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Bond certificate |
It is includes specifics such as the issuer's name, the par value, the contract interest rate, and the maturity date. (The evidence of the company's debt) |
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Contract rate (coupon rate,stated rate, nominal rate) |
The bond issuer pays the interest rate specified in the indenture. |
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Market rate |
The interest rate of borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level. |
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Discount on bonds payable |
Occurs when a company issues bonds with a contract rate less than the market rate which means the issue value is less than the par value. |
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Straight-Line method |
This method allocates an equal portion of the total bond interest expense to each interest period. |
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Premium on bonds |
The amount by which the bond price exceeds the par value. |
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Mortgage |
A mortgage is a legal agreement that helps protect a lender if a borrower fails to make required payments on notes or bonds. |
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Installment note |
An obligation requiring a series of payments to the lenders. Common for franchise and other businesses when lenders and borrowers agree to spread payments over several periods. |
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Two ways to retire bonds before maturity |
1. exercise a call option 2. purchase them on the open market. |
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Debt-to-equity ratio |
Total Liabilities/Total equity A measure to assess the risk of a company's financing structure. |
