Bonds & LT Notes Flashcards
(50 cards)
What is the term used to describe the retirement of debt before its schedule maturity date?
Early extinguishment of debt
What happens to any discount or premium on debt by the maturity date?
It is systematically reduced to zero
When debt is retired for less than its book value, what financial outcome is recorded?
A gain
What is one reason corporations might issue convertible bonds instead of straight debt?
To sell the bonds at a higher price.
How do convertible bonds benefit smaller firms or debt-heavy companies?
They provide access to the bond market.
Why might shareholders resist the direct issuance of additional equity?
It dilutes their ownership.
What is one benefit of including detachable stock purchase warrants in a bond issue?
It enables the company to issue debt when borrowing would otherwise be difficult.
How are the issue prices allocated between bonds and detachable stock purchase warrants?
On the basis of their fair values.
What is one key difference between convertible bonds and bonds with detachable warrants?
Bonds with detachable warrants can be exercised independently of the bonds.
What is the most common form of corporate debt?
Bonds
Why might a company prefer to issue bonds rather than signing a large promissory note?
To mange smaller, more manageable liabilities.
What is typically the maturity range for bonds issued by corporations?
10 to 40 years.
What is the primary purpose of a bond indenture?
To describe the specific promises made to bondholders.
Who typically holds the bond indenture on behalf of the bondholders?
A trustee, usually a commercial bank of financial institutions.
What differentiates a debenture bond from other types of bonds?
It is backed only by the full faith and credit of the issuing corporation.
What primary characteristic makes a mortgage bond less risky than a debenture?
It is backed by a lien on specified real estate.
What is a key difference between registered bonds and coupon bonds?
Registered bonds have the owner’s name registered with the issuing company.
What is the purpose of the call feature in corporate bonds?
To allow the issuing company to buy back bonds before maturity.
What is a ‘no call’ provision in the context of bonds?
A rule that prohibits bond calls during the initial years of a bond’s life.
How are serial bonds typically retired?
In installments during the life of the issue.
Adams Corporation’s balance sheet reports $100 million in bonds payable. Felix Company who purchased some of Adams’ bonds will report the bonds as
a. a prepaid asset.
b. equity.
c. an investment.
d. a receivable.
c. an investment.
Choose the statement that best describes the type of financial instruments that are commonly issued in today’s markets.
a. Capital markets have abandoned “exotic” financial instruments.
b. “Exotic” financial instruments currently are prohibited by the SEC.
c. “Exotic” financial instruments continue to be developed and offered to investors.
c. “Exotic” financial instruments continue to be developed and offered to investors.
The requirements of a future payment of a specific or estimated amount of cash, at a specific or projected date are characteristics of debt. Identify another common characteristic.
a. Periodic interest must be paid
b. Periodic interest is incurred
c. Periodic principal payments must be made
b. Periodic interest is incurred
Periodic interest expense on liabilities is calculated by multiplying the effective interest rate by the amount of debt
a. that has to be repaid at maturity.
b. referred to as the par value.
c. referred to as the face amount.
d. outstanding during the interest period.
d. outstanding during the interest period.
