Bond Market

Question 1

Issuing Shares

Answer 1

Creates no liabilities or interest expense.

Less risky to the issuing corporation.

Question 2

Issuing Notes or Bonds

Answer 2

Does not dilute share ownership or control of the corporation.
Results in higher earnings per share because the earnings on borrowed money usually exceeds interest expense

Question 3

Times-Interest-Earned Ratio

Answer 3

= Operating Income / Interest Expense
A high interest-earned ratio indicates ease in paying interest expense
A low interest-earned ratio indicates difficulty in paying interest expense

Question 4

Reporting Fair Market Value of Debt

Answer 4

All financial liabilities must be measured for reporting purposes at amortized cost using the effective-interest method.

Question 5

Current Liabilities

Answer 5

obligations due within one year or within the company’s normal operating cycle if longer.
Known amountEstimated amount

Question 6

Known Current Liabilities

Answer 6

Accounts payable
Short-term notes payable
Goods and services tax payable
Sales tax payable
Accrued expenses
Payroll liabilities
Unearned revenues
Current portion of long-term debt
Current portion of capital leases

Question 7

Current Liabilities

Answer 7

obligations due within
one year or within the company’s normal
operating cycle if longer.

Question 8

Why Issue Bonds?

Answer 8

Notes Payable and Leasing rarely provide enough money for plant expansion and large projects. To obtain large amounts of longterm capital, management must decide to issue bonds or to use equity financing (common stock)

Question 9

Types of Bonds

Answer 9

Secured and Unsecured Bonds
Term and Serial Bonds
Registered and Bearer Bonds
Convertible and Redeemable/Retractable Bonds

Question 10

Determining the market value of bonds

Answer 10

s

Question 11

Issuing Bonds at Face Value

Answer 11

The amount of principle due at the maturity date.

Question 12

Issuing Bonds at a Discount

Answer 12

s

Question 13

Issuing Bonds at a Premium

Answer 13

s

Question 14

Redeeming Bonds at Maturity

Answer 14

s

Question 15

Redeeming Bonds before Maturity

Answer 15

s

Question 16

Converting Bonds into Common Stock

Answer 16

s

Question 17

Long-term Notes Payable

Answer 17

s

Question 18

Lease Liabilities

Answer 18

s

Question 19

Other Long Term Liabilities

Answer 19

Lease Liabilities

Long-term Notes Payable

Question 20

Accounting for Bond Retirements

Answer 20

Redeeming Bonds at Maturity
Redeeming Bonds before Maturity
Converting Bonds into Common Stock

Question 21

Accounting for Bond Issues

Answer 21

Issuing Bonds at Face Value
Discount or Premium on Bonds
Issuing Bonds at a Premium
Issuing Bonds at a Discount

Question 22

Bond Financing Advantages

Answer 22

1. Shareholder control is not affected.
2. Tax savings result.
3. Earnings per share on common stock may be higher.

Question 23

Secured Bonds

Answer 23

Specific assets of the issuer are used as collateral for the bonds.
Mortgage Bonds
Sinking Fund Bond

Question 24

Term

Answer 24

Bonds that are due for payment (mature) at a single specified future date

Question 25

Registered Bonds

Answer 25

Bonds issued with the name of the owner and payments are made by cheque or direct deposit to the bond holder. Transfers of registered bonds requires cancellation of the bonds by the institution and issuance of new bonds.

Question 26

Convertible Bonds

Answer 26

can be converted into shares by the bondholder.

Question 27

Unsecured Bonds

Answer 27

Debenture Bonds are issued against the general credit of the borrower. Used extensively by large corporations with good credit ratings.

Question 28

Serial Bonds

Answer 28

Bonds that mature in instalments

Question 29

Bearer Bonds

Answer 29

Bearer (or coupon) bonds, holders are required to send in coupons to receive interest payments. Bearer bonds can be transferred directly to another party.

Question 30

Redeemable Bonds

Answer 30

Issuer can retire at a stated dollar amount prior to maturity . Also known as "callable bonds."

Question 31

Retractable Bonds

Answer 31

Can be redeemed prior to maturity at the option of the bond holder

Question 32

Junk Bond

Answer 32

High risk, unsecured bond which pays a high rate of interest

Question 33

Stripped Bond

Answer 33

Low risk, deep discount or zero interest bond. Pays very little or no interest.

Question 34

Contractual Interest Rate (Bonds)

Answer 34

Rate stated on bond certificate; stated as an annual interest rate, and interest is generally paid semi-annually