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32 Cards in this Set
- Front
- Back
- 3rd side (hint)
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Long-Term Liabilities
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-Probable future expenditures with current obligations that are not payable within the current operating cycle or reporting year, whichever is longer.
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Bond Indenture
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-Document that describes the contact between the issuer (borrower) and bond holders (lenders).
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Face (Par) Value
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-Total dollar amount of the bond and the basis on which periodic interest is paid.
-Bonds are issued at face (par) value when the stated rate equals the market rate. |
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Stated Rate
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-(or Nominal / Coupon Rate) The interest to be paid to the investors. It is specified in the bond contract.
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Market Interest Rate
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-(or the Effective Rate / Yield) Rate of interest actually earned by the bondholder and is the rate of return for comparable contracts on the bate the bonds are issued.
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Discount
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-When Market Rate > Stated Rate, bonds are issued at a discount. They will sell for less than the face amount to make up for the lower return provided.
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Premium
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-When Market < Stated Rate, bonds will be issued at a premium b/c the investor will pay more than the face value due to the higher return offered.
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Bonds
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-Represent a contractual promise by the issuing corporation to pay investors (bondholders) a specific sum of money at a designated maturity date plus periodic, fixed interest payments (usually semi-annually) based on a percentage of the face amount of the bond.
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Debentures
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-Unsecured bonds.
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Mortgage Bonds
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-Bonds that are secured by real property.
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Collateral Trust Bonds
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-Secured Bonds.
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Convertible Bonds
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-Convertible into common stock of the debtor (generally) at the option of the bondholder.
-2 types, detachable and nondetachable warrants. |
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Nondetachable Warrants
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-The convertible bond itself must be converted into capital stock.
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Detachable Warrants
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-The bond is not surrendered upon conversion, only the warrants plus cash representing the exercise price of the warrants.
-Warrants can be bought and sold separately from the bonds. |
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Participating Bonds
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-Have a stated rate of interest and also participate in income if certain earnings levels are obtained.
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Term Bonds
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-Bonds that have a single fixed maturity date at which time the entire principal is paid.
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Serial Bonds
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-Pre-numbered bonds that the issuer may call and redeem a portion by serial number.
-Often redeemed pro rata annually or in a series of annual installments. |
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Income Bonds
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-Bonds that only pay interest if certain income objectives are met.
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Zero Coupon Bonds
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-(or "Deep Discount Bonds") Are bonds sold with no stated interest but rather at a discount and redeemed at the face value without periodic interest payments.
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Commodity-Backed Bonds
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-(or "Asset-Linked Bonds") are bonds that are redeemable either in cash or a stated volume of a commodity, whichever is greater.
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Bonds Issued at Par
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-When the stated rate on the bond is equal to the market (effective) interest rate on the date the bonds are issued.
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Bond Issued at Discount
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-When stated rate on the bond is less than the market (effective) interest rate on date of issuance.
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Bonds Issued at Premium
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-When stated rate on the bond is greater than the market (effective) interest rate on the date of issuance.
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Bonds Payable
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-Should be recorded at face value and adjusted to the PV of their future cash outflows by either subtracting unamortized discounts or adding unamortized premiums.
-Recorded at the true PV at the date of issuance based on the market (effective) interest rate at that date. -Usually in denominations of $1,000. -Price is always quoted in 100's (% of par value) -Indenture is a contract for purchase of bond. |
-Coupon Rate = Stated Interest Rate on the bond.
-Bond Interest (check amount) = Coupon Rate x Face. -Generally pay interest semi-annually in the U.S. and annually in other countries. -Principal payoff is always the full face amount. -Premium/discount is the result of buyer and seller "adjusting" the coupon rate to the prevailing market rate of interest. |
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Bond Selling Price
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-Price is computed as the sum of the PV of future principal payment + the PV of the future periodic interest payments.
-Both CF's are discounted at the prevailing market rate of interest. |
-This recorded price is the value of the bond at its current cash equivalent.
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Stated Interest Rate
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-Typically printed on the bond and included in the bond indenture before its brought to market.
-Will not change regardless of market rate at date of issuance. -Although interest is typically paid semi-annually, it will accrue monthly. |
-Amount of cash received at regular interest payment intervals over the life of the bond will always be at the stated rate applied to the face amount of the bond.
-If this rate ≠ market rate there is a premium or discount. |
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Effective (Market) Interest Rate
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-Because amount of cash to be received in the future is fixed at the time bond is sold, market will automatically adjust the issue price of the bond so that the purchaser receives the market rate of interest for comparable risk bonds (i.e., the effective interest rate).
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-(or the Yield) is the coupon rate adjusted for the premium or discount.
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Discounts
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-Stated Rate < Market Rate. Bond will sell for less than face value. Difference between face value and sales price of the bond is the automatic adjustment to the interest rate.
1. Unamortized Discount: on bonds payable, is a contra account to bonds payable. Presented on the B/S as a direct reduction from the face (par) value of the bonds to arrive at the bond's carrying value at any particular point in time. |
2. Amortization of the Discount (General): bond discount represents additional interest to be paid to investors at the bond maturity and is amortized over the life of the bond. Amortized amounts increase interest expense each period. Amortization of the discount is added to the amount of cash paid at the stated rate to obtain GAAP interest expense.
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Premiums
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-Stated Rate > Market Rate. Bonds will sell than more than face value and the difference between face value and the sales price of the bond is the automatic adjustment to the interest rate.
1. Unamortized Premium: on bonds payable, is presented on the B/S as a direct addition to the face (par) value of the bonds to arrive at the bond's carrying value at any particular point in time. |
2. Amortization of the Premium (General): bond premium represents interest paid in advance to the issuer by bondholders who then receive a return of this premium in the form of larger periodic interest payments (at the stated rate). Premium is amortized over the life of the bond w/ amortized amounts decreasing interest expense each period. Therefore, the amortization of the premium is subtracted from the amount of cash paid at the stated rate to obtain GAAP interest expense.
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Carrying Value
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-As bonds approach maturity, their carrying values approach face value so that the carrying value equals face value at maturity.
-Equals face value plus the balance of unamortized premium or minus the balance of unamortized discount. |
-Carrying value of a bond with a discount increases to maturity value as the discount is amortized.
-Carrying value of a bond with a premium decreases to maturity value as the premium is amortized. |
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Bond Issue Costs
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-Transaction costs of the bond issue. Should be recorded as a deferred charge (asset) and amortized from the date of issuance of the bonds into expense (typically interest or bond issue expense) using the straight-line method.
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-Typically paid directly by the broker and are repaid to the broker by the company through the proceeds of the bond issue which means that the issuing company receives bond proceeds net of the bond issue costs.
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IFRS Bond Issue Costs
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-Under IFRS, bond issue costs aren't recorded as a separate asset.
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-They are deducted from the carrying value of the liability and amortized using the effective interest method.
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