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Financial Acct Systems 2 > Ch 14 p. 2 > Flashcards

Ch 14 p. 2 Flashcards

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1
Q

What happens to the value of a bond during a leveraged buyout? Why?

A

They lose value

Loss in value occurs because additional debt added in capital structure increases likelihood of default

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2
Q

Firm underwriting

A

Investment banks underwrite entire issue of bond by guaranteeing certain sum to company

Taking risk of selling bonds for whatever price they can get

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3
Q

Best efforts underwriting

A

Investment bank sells bond issue for commission onProceeds of sale

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4
Q

Private placement

A

Issuing company sells bonds directly to large institution,Financial or otherwise without aid of underwriting

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5
Q

Secured bonds

A

Backed by pledge of some sort of collateral

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6
Q

Mortgage bonds

A

Secured by claim on real estate

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7
Q

Collateral trust bonds

A

Secured by stocks and bonds of other corporations

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8
Q

Unsecured bonds

A

Bonds not backed by collateral

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9
Q

Junk bond, define? what do companies use these bonds for?

A

Unsecured and very risky, paying high interest rate

Used to finance leveraged buyouts

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10
Q

Term bonds

A

Bond issues that mature on single date

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11
Q

Serial bonds

A

Mature in installments

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12
Q

Serially maturing bonds are frequently used by… 4 things

A

School or sanitary districts, municipalities or other local

Taxing bodies that receive money through special levy

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13
Q

Callable bonds

A

Give issuer right to call and redeem bonds prior to maturity

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14
Q

Convertible bonds

A

Bonds are convertible into other securities of corporationFor specified time after issuance

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15
Q

What 2 types of bonds have been developed in attempt to attract capital in a tight money market?

A

1 commodity backed bonds2 deep discount bonds

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16
Q

Commodity backed bonds AKA asset-linked bonds

A

Redeemable in measures of commodity such as barrels ofOil, tons of coal, ounces of rare metal

Ex. Sunshine mining sold 2 issues of bonds redeemable with either $1000 cash or 50 ounces of silver, whichever isGreater at maturity, stated interest rate 8.5%

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17
Q

Deep discount bonds AKA zero interest debenture

A

Sold at discount provides buyers with total interest payoff At maturity

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18
Q

Registered bonds define, what 2 things do they require?

A

Bonds issued in name of owner

Require surrender of certificate and issuance of new
Certificate to complete sale

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19
Q

Bearer AKA coupon bond

A

Not recorded in name of owner

May be transferred from one owner to another by delivery

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20
Q

Income bonds

A

Pay no interest unless issuing company is profitable

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21
Q

Revenue bonds

A

Interest is paid from specific revenue sources

Ex. Issued by airports, school districts, counties, toll road authorities and government bodies

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22
Q

Bond is valued by its

A

Present value of expected future cashflows from interest

And principal

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23
Q

Stated AKA coupon or nominal rate

A

Interest rate written on bond certificate

Expressed as percentage of Maturity value

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24
Q

2 other names for maturity value

A

Par value, principal amount

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25
Discount
Bonds sell for less than face value
26
Premium
Bonds sell for more than face value
27
Effective yield AKA Market rate
Interest actually earned by bond holders
28
Recall that discount on bonds payable due to its relation to interest, companies...
Amortize the discount and charge it to interest expense | Over period of time that bonds are outstanding
29
Amortization: straight line method
Amortizes constant amount each interest period
30
1 Amortization of discount... 2 While amortization of premium...
1 Increases interest expense 2 Decreases interest expense
31
When companies issue bonds on other than interest payment dates, buyers of the bonds will pay the sell the...
Interest accrued from the last interest payment date | To the date of issue
32
Preferred procedure for amortization of discount or premium: effective interest method AKA present value amortization Equation (simple, broken down)
Amortization amt. =Bond Interest Expense - Bond Interest Paid = (carrying value of bonds at beginning of period x effective int. rt.) - (face amount of bonds x stated int. rt.)
33
How are unamortized bond issue costs treated?
Treated ad deferred charge and amortized over life of debt
34
IFRS: issue costs requirement, and it's effect?
Requires issue costs reduce carrying amount of the bond This increases the effective interest rate
35
Extinguishment of debt
Companies Payment of debt
36
Extinguishment of debt: if the company holds bonds to maturity
Company doesn't compute any gains or losses
37
Reacquisition price
Amount paid on extinguishment or redemption before maturity Including call premium and expense of Reacquisition
38
Net carrying amount of bonds on any specified sate
Amount payable at maturity adjusted for unamortized | Premium or discount and cost of issuance
39
Gain from extinguishment
Any excess of net carrying amount over Reacquisition price
40
Loss from extinguishment
Excess of reacquisition price over net carrying amount
41
In substance defeasance
Arrangement whereby company provides future repayment Of Longterm debt issue by placing purchased securities in Irrevocable trust Not considered extinguishment of debt
42
The amortized premium or discount and any costs of issue applicable to the bonds must be...
Amortized up to reacquisition date
43
Refunding, when is it advantageous?
Replacement of an existing bond issue with a new one Advantageous to replace entire outstanding bond issue With a new issue bearing a lower interest rate
44
Longterm notes payable, 2 similarities to bonds, 1 difference
Similar in substance to bonds: 1 fixed maturity dates 2 carrying either stated or implicit interest rate Difference: do not trade as readily as bonds in Public security markets
45
In instances where company measures present value of debt instrument by fair value of property, goods or services: if there is no stated rate of interest, the amount of interest is...
Difference between face amount of note and fair value | Of property
46
1 Imputation 2 Imputed interest rate
1 process of interest rate approximation 2 resulting interest rate from imputation
47
Mortgage note payable
Promissory note secured by document called mortgage That pledges title to property as security for loan Most common form of Longterm notes payable
48
Point
One percent of effective interest rate of note
49
Fixed rate mortgages
Interest rate stays constant
50
Variable rate mortgages AKA floating rate or adjustable rate mortgages When are they adjusted? What are they pegged to either of 2 rates?
Feature interest rates tied to changes in fluctuating market Rate Lenders adjust interest rates in either 1 year or 3 year intervals Adjustments pegged to changes in prime rate or US Treasury Bond rate
51
What happens if companies choose the fair value option?
Noncurrent liabilities: bonds, and notes payable are recorded At fair value unrealized holding gains or losses reported as part of net income
52
Unrealized holding gain or loss
Net change in fair value of liability from 1 period to another Exclusive of interest expense recognized but not recorded
53
Off balance sheet financing
Attempt to borrow monies in such a way to prevent | Recording obligations
54
3 common forms of off balance sheet financing
1 non-consolidated subsidiary 2 special-purpose entity (SPE) 3 operating leases
55
Off balance sheet financing: non-consolidated subsidiary
Parent company doesn't have to consolidate subsidiary Company that is less than 50 percent owned Parent doesn't need to report assets and liabilities of Subsidiary
56
Off balance sheet financing: special-purpose entity (SPE) 2 Project financing arrangement, why is it used?
1 Created to perform special project 2 management creates an SPE for purpose to build project Management does not want to report the plant or borrowing Used to fund the construction on the balance sheet
57
Off balance sheet financing: SPE: take or pay contracts
The SPE finances and builds the plant, while the company Guarantees that it or outside party will purchase all products Produced by plant Allows company to keep assets and liabilities from project Off balance sheet
58
Off balance sheet financing: operating leases
Instead of owning assets companies lease them Only report rent expense and note of disclosure
59
In order to get off balance sheet financing special purpose entities (SPEs) often use...
Leases
60
Why do companies engage in off balance sheet financing? 2 main reasons
1 many believe removing debt enhances quality of balance Sheet and permits credit to be obtained more readily at Cheaper rate 2 loan covenants limit amount of debt company may have
61
To fight off balance sheet debt, what does SOX require companies to disclose? 2 things, how are they presented?
1 all contractual obligations in tabular format 2 contingent liabilities and commitments in either textual Or tabular format
62
IFRS securities are not required to disclose...
All contractual obligations or contingent liabilities
63
Debt to assets ratio, what does it measure?
Debt to assets = total liablities/total assets Measures percentage of total assets provided by creditors
64
Times interest earned ratio, what does it measure?
Times interest earned = (Income before income taxes and interest expense)/(interest exp.) Indicates company's ability to meet interest payments As they come due
65
In the banking industry when the company bond's credit rating drops...
They can record a gain, because their liability value drops If value of company's liability is less they are better off So they can record a gain

Financial Acct Systems 2 (22 decks)

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