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Chapter 10 &11
Test #5
25
Accounting
Undergraduate 2
05/01/2012

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Term
Bond
Definition
a contract in which a borrower promises to pay a specified rate of interest to a lender for each period the bond is outstanding and repay the principal at the maturity date. The maturity date of a bond is normally greater than 10 years.
Term
Unsecured Bonds
Definition
bonds for which no collateral has been pledged to guarentee their repayment.
Term
Secured Bonds
Definition
Bonds for which assets have been pledged in order to guarentee repayment.
Term
Registered Bonds
Definition
Bonds for which the names and addresses of the bondholders are kept on file by the issuing company and pays interesst only to those names on file.
Term
Coupon Bonds
Definition
unregistered bonds for which owners receive periodic interest payments by clipping a coupon from the bond and sending it to the issuer as evidence of ownership
Term
Term Bonds
Definition
bonds that mature in one single sum at a specific future date.
Term
Serial Bonds
Definition
bonds that mature in a series of installments at specified future dates.
Term
Callable Bonds
Definition
bonds for which the issuer reserves the right to pay the obligation before its maturity date
Term
Convertible Bonds
Definition
bonds that can be traded for, or converted to, other securities after a specified period of time
Term
Zero Coupon(deep discount) bonds
Definition
bonds issued with no promise of interest payments; only a single payment will be made
Term
Junk Bonds
Definition
bonds issued by companies in weak financial condition with large amounts of debt already outstandinf; these bonds yield high rates of return because of high risk
Term
Bond identure
Definition
a contract between a bond issuer and a bond purchaser that specifies the terms of a bond. The market price of the bond is influenced by the riskiness of the bonds, interest rate at which the bonds are issued
Term
Principal
Definition
Face value,Maturity; the amount that will be paid on a bond at the maturity rate
Term
Bond Maturity Date
Definition
the date at which a bond principal or face amount becomes payable. When a company issues bonds, they will make two payments. Payment of interest of a fixed amount at equal intervals over the life of the bond. And a single payment the principal at maturity date.
Term
Market Rate(effective rate;yield rate)
Definition
the actual interest rate earned or paid on a bond investment
Term
Stated Rate of interest
Definition
the rate of interest printed on the bond
Term
Market vs States Rate
Definition

Market>Stated=discount

Market<Stated=premium

Term
Bond Discount 
Definition
the difference between the face value and the sales price when the bonds are sold below their face value. Bonds face value is 800,000 sell for 741,124.
Term
Bond Premium
Definition
the difference between the face value and the sales price when bonds are sold above their face value
Term
4 steps to computing bond values
Definition

1. Determine the market interest rate

2. Compute the present value of the maturity amount

3. Compute the present value of the annuity of annual interest payment(using the market interest rate as the discount rate)

4. Add the quantities computed in 2 and 3.

Term
When a company issues bonds it must account for;
Definition

1. Issuance(sale) of the bonds

2. Interest Payments

3. Amortization of any bond premium or discount.

Term
Debt Ratio
Definition
the measure of leverage computed by dividing total liabilities by total assets. It measures the amount of assets supplied by lenders.
Term
Debt to Equity Ratio
Definition
the number of dollars borrowed funds for every dollar invested by owners; computed as total liabilities divided by total stockholders equity.
Term
Times Interest Earned
Definition
a measure of borrower's ability to make required interest payments; computed as income before interest and taxes divided by annual interest expense. This measures how much cushion a company has in terms of being able to make its periodic interest payments.
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