Term
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Definition
| Bonds without the name of the owner, which may be transferred from one owner to another by mere delivery. (p. 785). |
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Term
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Definition
| The difference between the face value of a bond and its selling price when the bond sells for less than face value. (p. 787). |
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Term
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Definition
| A contract for a bond that represents a promise to pay a sum of money at a designated maturity rate, plus periodic interest at a specified rate on the maturity amount (face value). (p. 784). |
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Term
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Definition
| The difference between the face value of a bond and its selling price when the bond sells for more than face value. (p. 787). |
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Term
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Definition
| Bonds that give the issuer the right to call and retire the bonds prior to maturity. (p. 785). |
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Term
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Definition
| The face amount of a bond minus any unamortized discount, or plus any unamortized premium. Synonymous with the term book value. (p. 791). |
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Term
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Definition
| Bonds that are redeemable in measures of a commodity (e.g., barrels of oil, tons of coal, or ounces of rare metal). Also called asset-linked bonds. The accounting problem for such bonds is to project their maturity value in markets where commodity prices fluctuate. (p. 785). |
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Term
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Definition
| Bonds that permit holders to exchange them for (convert them to) other securities of a corporation (typically common stock) for a specified time after issuance. (p. 785). |
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Term
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Definition
| Unsecured bonds, which are issued against the general credit of the borrower (issuer). (p. 785). |
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Term
| debt to total assets ratio |
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Definition
| Coverage ratio that measures the percentage of the total assets provided by creditors. Computed as total debt divided by total assets. The higher the percentage of debt to total assets, the greater the risk that the company may be unable to meet its maturing obligations. (p. 808). |
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Term
| deep-discount (zero-interest) debenture bonds |
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Definition
| Long-term, unsecured debt securities that do not bear interest. They are sold at a discount that provides the buyers total interest payoff at maturity. Also called zero-interest debenture bonds. (p. 785). |
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Term
| effective-interest method |
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Definition
| The preferred procedure for computing the amortization of a discount or premium. Under this method, companies compute bond interest expense (revenue) at the beginning of the period by the effective-interest rate) and then subtract bond interest paid (calculated as the face amount of the bonds times the stated interest rate); the result is the amortization amount. (p. 791). |
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Term
| effective yield, or market rate |
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Definition
| The rate of interest the bondholders actually earn on a bond (and which takes into account the frequency of compounding). If bonds sell at a discount, the effective yield exceeds the stated rate; if bonds sell at a premium, the effective yield is lower than the stated rate. (p. 787). |
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Term
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Definition
| The payment of debt. If a company holds a debt security to maturity, it does not compute any gains or losses; the carrying amount will equal the maturity (face) value of the bond. If a company extinguishes debt prior to maturity, it must calculate any gain or loss from extinguishment and report such gain or loss in net income. (p. 795). |
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Term
| face, par, principal, or maturity value |
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Definition
| On a bond, the amount of capital that must be repaid at maturity. The terms face value, par value, principal amount, or maturity value are used interchangeably. (p. 786). |
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Term
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Definition
| The recording of financial assets or financial liabilities at fair value, with unrealized holding gains and losses reported as part of net income. (p. 803). |
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Term
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Definition
| The process of interest-rate approximation, which occurs when a company cannot determine the fair value of the property, goods, services, or other rights, and if the note has no ready market. (p. 801). |
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Term
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Definition
| The result of interest-rate approximation, which occurs when a company cannot determine the fair value of the property, goods, services, or other rights, and if the note has no ready market. (p. 801). |
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Term
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Definition
| Bonds that pay no interest unless the issuing company is profitable. (p. 785). |
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Term
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Definition
| Probable future sacrifices of economic benefits arising from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer. Examples are: bonds payable, long-term notes payable, mortgages payable, pension liabilities, and lease liabilities. (p. 784). |
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Term
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Definition
| Similar in substance, in that both have fixed maturity dates and carry a stated or implicit interest rate, but notes do not trade as readily as bonds in the organized public securities market. (p. 797). |
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Term
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Definition
| A promissory note secured by a document called a mortgage, which pledges title to property as security for the loan. (p. 802). |
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Term
| offbalance-sheet financing |
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Definition
| Borrowing funds in a way that avoids recording the obligations. Examples of such arrangements are nonconsolidated subsidiaries, special purpose entities, and operating leases. Companies engage in offbalance-sheet financing as a way to remove debt from the balance sheet or bypass loan covenants. In response to offbalance-sheet financing gone bad (e.g., Enron), the FASB has tightened the rules that allow off-balance sheet accounting and increased disclosure (note) requirements related to this type of financing. (p. 804). |
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Term
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Definition
| The replacement of an existing bond issue with a new one. A company may find it advantageous to acquire its entire outstanding bond issue and replace it with a new bond issue bearing a lower rate of interest. The company should recognize as income the gain from the refunding in the period of redemption. (p. 796). |
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Term
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Definition
| Bonds issued in the name of the owner. At redemption or in a sale of the bond, they require surrender of the certificate. (p. 785). |
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Term
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Definition
| Bonds that pay interest from specified revenue sources (e.g., airports, school districts, counties, toll-road authorities, and governmental bodies). (p. 785). |
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Term
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Definition
| Bonds backed by a pledge of some sort of collateral. For example, mortgage bonds are secured by a claim on real estate; collateral trust bonds are secured by stocks and bonds of other corporations. (p. 785). |
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Term
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Definition
| Bond issues that mature in installments. School or sanitary districts, municipalities, or other local taxing bodies that receive money through a special levy frequently use serially maturing bonds. (p. 785). |
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Term
| special-purpose entity (SPE) |
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Definition
| A legal entity created to perform a special activity (issue securities, complete a project, perform R&D activities). The company that creates the SPE guarantees that it or some outside party will eventually perform the activity. Use of the SPE enables the company that created it to avoid reporting any assets or liabilities related to the activities on its balance sheet. (p. 804). |
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Term
| stated, coupon, or nominal rate |
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Definition
| The interest rate written in the terms of the bond indenture (and often printed on the bond certificate). The issuer of the bonds sets this rate, expressed as a percentage of the bonds face value. (p. 786). |
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Term
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Definition
| Method for computing bond amortization. Under the straight-line method, companies amortize a constant amount each year. Although the FASB recommends the effective-interest method, companies may use a straight-line method if the results obtained are not materially different from those produced by the effective-interest method. (p. 789). |
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Term
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Definition
| Bond issues that mature on a single date. (p. 785). |
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Term
| times interest earned ratio |
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Definition
| Solvency ratio that indicates the companys ability to meet interest payments as they come due. Computed as income before income taxes and interest expense divided by interest expense. (p. 808). |
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Term
| zero-interest debenture bonds |
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Definition
| Long-term, unsecured debt securities that do not bear interest. They are sold at a discount that provides the buyers total interest payoff at maturity. Also called deep-discount bonds. (p. 785). |
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Term
| troubled-debt restructuring |
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Definition
| Occurs when a creditor grants to the debtor, due to the debtors financial difficulties, concessions that it would not otherwise consider. A troubled-debt restructuring involves either (1) settlement of debt at less than its carrying amount, or (2) continuation of debt with a modification of terms. (p. 811). |
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