Accounting 201Chapter 09 Key Words

Question 1

Amortization schedule

Answer 1

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

Question 2

Bond

Answer 2

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

Question 3

Bond indenture

Answer 3

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

Question 4

Callable

Answer 4

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

Question 5

Capital lease

Answer 5

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

Question 6

Capital structure

Answer 6

The mixture of liabilities and stockholders’ equity in a business.

Question 7

Carrying value

Answer 7

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

Question 8

Convertible

Answer 8

A bond feature that allows the lender (or investor) to convert each bond into a specified number of shares of common stock. Shares can be exchanged for common stock.

Question 9

Debt financing

Answer 9

Obtaining additional funding from lenders.

Question 10

Debt to equity ratio

Answer 10

Total liabilities divided by total stockholders’ equity; measures a company’s risk. Total liabilities divided by stockholders’ equity; measures a company’s solvency risk.

Question 11

Default risk

Answer 11

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

Question 12

Discount

Answer 12

A bond’s issue price is below the face amount.

Question 13

Early extinguishment of debt

Answer 13

The issuer retires debt before its scheduled maturity date.

Question 14

Equity financing

Answer 14

Obtaining additional funding from stockholders.

Question 15

Installment payment

Answer 15

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

Question 16

Lease

Answer 16

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

Question 17

Market interest rate

Answer 17

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

Question 18

Operating lease

Answer 18

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

Question 19

Premium

Answer 19

A bond’s issue price is above the face amount.

Question 20

Private placement

Answer 20

Sale of debt securities directly to a single investor.

Question 21

Return on assets

Answer 21

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

Question 22

Return on equity

Answer 22

Net income divided by average stockholders’ equity; measures the income generated per dollar of equity.

Question 23

Secured bonds

Answer 23

Bonds that are supported by specific assets pledged as collateral.

Question 24

Serial bonds

Answer 24

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

Question 25

Sinking fund

Answer 25

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

Question 26

Stated interest rate

Answer 26

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

Question 27

Term bonds

Answer 27

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

Question 28

Times interest earned ratio

Answer 28

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

Question 29

Unsecured bonds

Answer 29

Bonds that are not supported by specific assets pledged as collateral.