question

What is listed after current liabilities and will not be satisfied in one year?

answer

long-term liabilities

question

Types of Long-Term Liabilities

answer

Bonds or notes, Leases, Deferred taxes

question

Bond

answer

Security of financial instrument that allows firms to borrow large sums of noney and repay the loan over a long period of time.

question

Bonds are sold or issued to investors who want what?

answer

a return on their investment

question

Borrower

answer

promises to repay the principle on a specified date, the due date, or maturity date.

question

Bonds payable result from what?

answer

from borrowing funds and are generally issued in denominations of $1000

question

Face Value

answer

The principle amount of the bond as stated on the bond certificate (This is the amount that the firm must pay at the maturity date of the bond)

question

How long are bond maturities?

answer

up to 30 years

question

Why do investors in bonds want to sell them?

answer

If interest rates paid by competing investments become more attractive or if the issuer becomes less credit worthy. Buyers are betting that interest rates will reverse course of that he company will get back on its feet

question

Collateral

answer

Represents that assets that back the bonds in case the issuer cannot make the interest and principle payments and must default on the loan

question

Debenture bonds

answer

Bonds that are not backed by specific collateral Investor must examine the general credit worthiness of the issuer

question

If a bond is a secured bond

answer

Certificate indicates specific assets that serve as collateral in case of default

question

Due date

answer

Specifies the date that the bond principal must be repaid

question

Normal bonds = Term bonds

answer

Entire principle amount is due on a single date

question

Serial bonds

answer

Not all the principle is due on the same date

question

Why might firms prefer serial bonds?

answer

Firm does not ned to accumulate the entire amount for principle repayment at one time

question

Convertible bonds

answer

can be converted into common stock at a future time. Allows the investor to buy a security that pays a fixed interest rate by that can be converted @ a future date into an equity security (STOCK) if the issuing firm is growing and profitable

question

Why are convertible bonds advantageous to issuing firms

answer

normally carry a lower rate of interest

question

Callable bonds

answer

Bonds that may be redeemed or tiered before their specified due date Paid at redemption price/reacquisition price

question

Important characteristics of bonds payable include

answer

par value Due date Interest rate An indication of whether the bonds are convertible or callable Any property collateralizing the bonds

question

Face rate

answer

Amount of interest that will be paid on each interest period specified on the bond certificate, determines that cash to be paid each interest period.

question

Other names for Face rate of interest

answer

Stated rate, nominal rate, contract rate, coupon rate

question

Face Rate Example, $10,000 bonds, 8% annual face rate of interest. How must $interest would be paid at the end of each period?

answer

800$ (10,000x8%x1 year)

question

Face Rate Example, $10,000 bonds, 8% annual face rate of interest. How must $interest would be paid at the end of each period to be paid semi annually?

answer

400$ (10,000x8%x1/2 year)

question

Market rate

answer

Rate that bondholders could obtain by investing in other bonds that are similar to the issuing firm's bonds. Rate bondholders could obtain from other similar bonds in the market.

question

Other names for market rate of interest

answer

Effective rate, bond yield

question

How is market rate determined?

answer

By the bond market on the basis of many transactions for similar bonds

question

What does the market rate incorporate?

answer

All of the "market's" knowledge about economic conditions and all of its expectations about future conditions.

question

Bond issue price

answer

= Bond issue price of the annuity of interest payments + the present value of the the principle

question

How is the bond Issue price determined?

answer

by the relationship between the face rate and market rate of interest, and by market's perception of risk.

question

Bond issue price Representation

answer

= present value of interest payments (annuity) discounted at market rate + present value of maturity value discounted at market rate

question

Two types of cash flows that the bond will produce for the investor?

answer

Interest recepits, Repayment of principle (face value)

question

What is the repayment of principle, when does it occur?

answer

One time receipt that occurs at the END of the term of the bonds.

question

Premium

answer

= Issue price - Face Value

question

When are bonds issued a premium?

answer

When the face rate exceeds the market rate

question

What is a premium an addition of?

answer

The bonds payable liability on the balance sheet

question

(Journal Entry) To record the issuance of bonds payable Premium

answer

Debit cash -> credit, bonds payable, premium on bonds payable

question

Balance sheet representation of premium on bonds payable

answer

Long term Liabilities: Bonds payable, plus premium on bonds payable

question

Discount

answer

= Face value - issue price

question

When are bonds issued at a discount?

answer

When the market rate of interest exceeds te face rate. What is a discount a deduction of?: The bonds payable liability (Contra liability)

question

(Journal Entry) To record the issuance of bonds payable Discount

answer

Debit, Cash, discount on bonds payable -> Credit, bonds payable

question

Balance sheet representation of discount on bonds payable

answer

Long term Liabilities: Bonds payable, Less Discount on bonds payable

question

If Market rate = Race rate

answer

Bond are issued at a face value amount

question

If Market rate > Race rate

answer

Bond are issued at discount

question

If Market rate < Race rate

answer

Bond are issued at a premium

question

The relationship between interest rate and bonds is always?

answer

Inverse

question

Amortization

answer

Process of transferring an amount from the discount or premium account to interest expense each time period to adjust interest expense.

question

Amortization of premium or discount on bonds payable allocates the difference in what?

answer

interest rates over the life of the bond so that interest expense each period reflects the effective rate, or the market rate, of the borrowing.

question

Effective interest method of amortization

answer

The process of transferring a portion of the premium or discount to interest expense; this method results in a constant effective interest rate.

question

Effective Interest method calculates

answer

Interest on the net liability every period at the market rate.

question

Effective interest method, bonds issued at a discount

answer

Net liability starts below face value and increases every period until discount is fully amortized at maturity.

question

Effective interest method, bonds issued at a premium

answer

Net liability starts above face value and decreases every period until the premium is fully amortized at maturity

question

Effective rate

answer

=Annual interest expense/carrying value

question

Carrying value for discount

answer

The face value - unamortized Discount

question

Carrying value for premium

answer

The face value + unamortized Discount

question

Cash interest

answer

= Bond face value x Face rate

question

Interest expense

answer

= Carrying value x Effective rate

question

Discount amortized

answer

= Interest expense - Cash Interest

Chapter 10, Financial Accounting – Flashcards

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