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  • Amortization schedule

    Provides a summary of the cash interest payments, interest expense, and changes in carrying value for debt instruments

    Bond

    A formal debt instrument that obligates the borrower to repay a stated amount, referred to as the principle or face amount, at a specified maturity date

    Bond indenture

    A contract between a firm issuing bonds and the corporations or individuals who purchase the bonds

    Callable

    A bond feature that allows the borrower to repay bonds before their scheduled maturity date at a specified call price

    Capital lease

    Contract in which the lessee essentially buys an asset and borrows the money through a lease to pay for the asset

    Capital structure

    The mixture of liabilities and stockholders' equity in a business

    Carrying value

    The balance in the bonds payable account. Equals the face value of the bonds payable minus the discount or the face value plus the premium

    Convertible

    A bond feature that allows the lender (or investor) to convert each bond into a specified number of shares of common stock

    Debt financing

    Obtaining additional funding from lenders

    Debt to equity ratio

    Total liabilities divided by total stockholders' equity. Measures a company's risk

    Default risk

    The risk that a company will be unable to pay the bond's face amount or interest payments as it becomes due

    Discount

    A bond's issue price is below the face amount

    Early extinguishment of debt

    The issuer retires debt before its scheduled maturity date

    Equity financing

    Obtaining additional funding from stockholders

    Installment payment

    Includes both an amount that represents interest and an amount that represents a reduction of the outstanding balance

    Lease

    A contractual arrangement by which the lessor (owner) provides the lessee (user) the right to use an asset for a specified period of time

    Market interest rate

    Represents the true interest rate used by investors to value a bond

    Operating lease

    Contract in which the lessor owns the asset and the lessee simply uses the asset temporarily

    Premium

    A bond's issue price is above the face amount

    Private placement

    Sale of debt securities directly to a single investor

    Return on assets

    Net income divided by average total assets. Measures the income generated per dollar of assets

    Return on equity

    Net income divided by average stockholders' equity. Measures the income generated per dollar of equity

    Secured bonds

    Bonds that are supported by specific assets pledged as collateral

    Serial bonds

    Bonds that require payment of the principal amount of the bond over a series of maturity dates

    Sinking fund

    An investment fund used to set aside money to be used to pay debts as they come true

    Stated interest rate

    The rate quoted in the bond contract used to calculate the cash payments for interest

    Term bonds

    Bonds that require payment of the full principal amount of the bond at a single maturity date

    Times interest earned ratio

    Ratio that compares interest expense with income available to pay those charges

    Unsecured bonds

    Bonds that are not supported by specific assets pledged as collateral

    Identify the most common form of corporate debt.

    Bonds
    Notes
    Leases
    Retained earnings

    Bonds are the most common form of corporate debt.

    To lower the costs associated with a bond issue, Tampa Mining Company sells debt securities worth $100 million directly to an insurance company. What is this an example of?

    Hedging
    Leasing
    Private placement
    Due diligence

    Private Placement, To keep costs down, the issuing company might choose to sell the debt securities directly to a single investor, such as a large investment fund or an insurance company. This is referred to as a private placement.

    Paying dividends to stockholders reduces taxable income because dividends are an expense.

    True
    False

    False, Paying dividends to stockholders does not reduce taxable income because dividends are not an expense.

    All of the following are primary sources of long-term debt financing for companies, except _____.

    leases
    stock issue
    bonds
    notes

    Stock Issue, Companies have three primary sources of long-term debt financing: bonds, notes, and leases.

    A bond is backed by collateral and can be redeemed early by the borrower. Which bonds are these?

    Secured, Callable

    A debenture matures in installments. The invester also has the option of exchanging it for common stock. Which bonds are these?

    Unsecured, Serial, Convertable

    A bond requires full payment of the full principle amount of the bond at a single maturity date. The investers assurance or security is the "full faith and credit" of the borrower. It has a feature that protects the borrowere against future drops in interest rates. Which bonds are these?

    callable, term, unsecured

    A bond is issued at a premium. The entry to record the semiannual interest payment will include a what?

    debit to bonds payable, Note that the liability balance decreases over time.

    Windsor, Inc., issues 7 percent, 10-year bonds with a face amount of $1 million on January 1, 2012, for $932,048, when other bonds of similar risk are paying 8 percent. Interest expense associated with this bond for the first semiannual period is

    37,282 Think about the carrying value and the interest rate that should be used for calculating this expense.

    the interest expense associated with a bond is less than the cash paid for interest. The bond was sold at a

    Premium, When the bond sells at a premium, the interest expense is less than the cash paid for interest.

    for bonds issued at a what?, interest expense will decrease each semiannual interest period.

    Premium, Think of a bond issue, which involves reduction in carrying value over time.

    The carrying value of bonds issued at a discount or at a premium will be different from their face amount at maturity.

    True
    False

    False, Think of the increases/decreases in the carrying value of the debt over time.

    On January 1, 2012, a company issues $100,000 of 8 percent bonds maturing in 10 years when other bonds of similar risk pay 7 percent. The bonds will _____.

    issue at a premium
    issue at a discount
    issue at face amount

    Issue at a premium, Think about the relative attractiveness of the bond.

    On January 1, 2012, a company issues $100,000 of 8 percent bonds maturing in 10 years when other bonds of similar risk pay 9 percent. The bonds were issued at a discount. Market interest rates drop to 6 percent by December 31, 2013. The company retires these bonds on December 31, 2013. Which of the following is true?

    The bonds can be retired at their carrying value
    The company will incur a loss
    The company will incur a gain
    No gain or loss will be recorded

    The company will occur a loss, Think of the difference between the carrying value and the retirement price.

    When interest rates go down, bond prices go up.

    True
    False

    True, Think about the inverse relationship

    Zeta Corporation issues $100,000 of 8 percent bonds maturing in 10 years on January 1, 2012, when other bonds of similar risk pay 9 percent. The bonds were issued at a discount. Market interest rates drop to 7 percent by December 31, 2012. The company retires these bonds on December 31, 2012. How much did it cost the company to retire them?

    $106,595
    $100,000
    $93,496
    $93,920

    $106,595
    Use the new market interest rate and the remaining periods to maturity in your calculations.

    In the case of installment notes, interest is calculated as a constant percentage of the....

    carrying value
    origonal loan amount

    Carrying Value, Interest is calculated as a constant percentage of carrying value.

    The entry to record monthly installment payments includes a what to Notes Payable?

    Debit, Note that a portion of the liability is reduced with each installment payment.

    in case of a(n) ?, the lessee records the lease just as if it had bought the asset and borrowed the money from the lessor.

    operating lease
    Capital Lease

    Capital Lease, Note that this is not a simple "rental" situation.

    over the lease term of a(n) ?, the lessee records rent expense and the lessor records rent revenue.

    operating lease
    Capital Lease

    Operating Lease, Note that this describes leases similar to rentals.

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