Chapter 14- (Part 1)

Front 1

What is a bond indenture?

Back 1

A document that describes the specific promises made to the bond holders

Front 2

Who holds the bond indenture?

Back 2

Usually held by a trustee (commercial bank or financial institution) appointed by issuing firm to represent rights of the bond holders

Front 3

Zero-coupon Bond

Back 3

1) issued at deep discount

2) does NOT pay interest

Front 4

Zero-coupon bond advantages

Back 4

1) can deduct annual interest expense for tax purposes

2) has no related cash flow until bond matures

Front 5

Who usually invests in Zero-coupon bonds?

Back 5

Pension funds, IRA's, and charitable organizations (usually has a "tax-deferred" or "tax-exempt" status)

Front 6

Effective Interest Formula

Back 6

Effective rate X balance of debt outstanding

Front 7

What decreases the book value of bonds?

Back 7

A discount and debit balance in the fair value adjustment account

Front 8

Shareholder's equity Formula

Back 8

Total assets - total liabilities

Front 9

Debenture Bond

Back 9

secured by "full faith and credit". No specific assets pledged as security

Front 10

Mortgage Bond

Back 10

backed by a lien on specified real estate owned by issuer. Less risky so typically has a lower interest rate.

Front 11

Coupon (Bearer) Bonds

Back 11

name of owner is not registered. Coupon is clipped & is redeemed in accordance with instructions in the indenture.

Front 12

Convertible Bonds

Back 12

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

Front 13

Serial Bonds

Back 13

more structured & less popular. Retired in installments during all/part of the life of the issue. Each bond has its own maturity date.

Front 14

Callable (redeemable)

Back 14

allows issuing company to buy back outstanding bonds from bondholders before scheduled maturity date.

Front 15

JE- Bonds sold at face amount

Back 15

(Issuer)

Debit- CASH

Credit- BONDS PAYABLE

(Investor)

Debit- INVESTMENT IN BONDS

Credit- CASH

(no interest because time hasn't passed)

Front 16

JE- Bonds sold at a Discount

Back 16

(Issuer)

Debit- CASH

Debit- DISCOUNT ON BONDS PAYABLE (diff.)

Credit- BONDS PAYABLE (face)

(Investor)

Debit- INVESTMENT IN BONDS (face)

Credit- DISCOUNT ON BOND (difference)

Credit- CASH

Front 17

JE- Bonds sold at a Premium

Back 17

(Issuer)

Debit- CASH

Credit- BONDS PAYABLE (face)

Credit- PREMIUM ON BONDS (difference)

(Investor)

Debit- INVESTMENT IN BONDS (face)

Debit- PREMIUM ON BOND INVEST. (diff.)

Credit- CASH

Front 18

Long term liabilities are reported at their

___________ value.

Back 18

PRESENT

Front 19

_______________ and ______________ are used to

calculate the issue price of bonds.

Back 19

Market interest rate; future cash flows

Front 20

A ______ balance in the fair value adjustment

account would increase the book value of the bonds.

Back 20

CREDIT

Front 21

Periodic interest payment formula

Back 21

Face Amount x Stated rate

Front 22

When can the straight-line method be used for amortization of discount or premium bonds?

Back 22

ONLY if it produces results that are not materially different from those produced by the effective interest method.

Front 23

Which types of companies are likely to issue bonds?

Back 23

Midsize and large companies

Front 24

On the date bonds are issued, bond issue costs should be recognized as _______.

Back 24

ASSETS

Front 25

When a promissory note matures and is paid, the borrower should ______ note payable and the lender should _______ notes receivable.

Back 25

Debit; Credit

Front 26

Bond yields

Back 26

Bond issues are priced to yield the market rate and supply and demand influence bond yields.

Front 27

To calculate amount of interest paid on a bond

Back 27

Face Amount x STATED rate

Front 28

Bonds with detachable warrants

Back 28

The warrants can be exercised separately from the bonds and the warrants can be sold by the bondholder to another investor

Front 29

The amortization of a bond discount _________

the carrying value of the bonds.

Back 29

INCREASES

Front 30

A decline in market interest rates will likely _____

bond prices.

Back 30

INCREASE

Front 31

Reasons companies issue convertible bonds:

Back 31

1) sell bonds at a higher price

2) enable smaller or debt-heavy companies to gain access to the bond market

3) use a medium of exchange in mergers and acquisitions.

Front 32

Instead of selling bonds to individual investors, bond issuers typically engage an _________ to sell the bonds.

Back 32

UNDERWRITER

Front 33

A decline in market interest rates will likely _____

bond prices.

Back 33

INCREASE

Front 34

Private placements of bonds typically incur lower bond issue costs because they are not subject to ______________.

Back 34

SEC registration

Front 35

Common methods used by bond issuers to induce bond holders to convert their bonds to common stock are:

Back 35

1) Stock warrants

2) Favorable conversion rates

3) Additional cash

Front 36

If a company elects the fair value option for bonds payable, unrealized gains & losses due to changes in credit risk are reported as a part of ______________

Back 36

OCI

Front 37

Options available for modifying debt agreement terms:

Back 37

1) debt may be settled at the time of restructuring

2) the debt can be continued with modified terms

Front 38

Calculating present value price of bonds

Back 38

Interest= dollar amount x PVA of $1

Principle= selling price x PV of $1