Chapter 13

Question 1

What are bond contracts know as

Answer 1

bond indentures

Question 2

what is a bond indenture

Answer 2

a promise to pay a sum of money at designated maturity date, plus interest

Question 3

what is the typical face value of a bond

Answer 3

$1000

Question 4

What is a secured bond

Answer 4

a bond that is backed by a pledge of some sort of collateral

Question 5

what is an unsecured bond

Answer 5

bond not backed by collateral

*usually have very high interest rates

Question 6

What is a term bond

Answer 6

a bond that matures on a single date

Question 7

What is a serial bond

Answer 7

a bond that matures in installments

Question 8

What is a callable bond

Answer 8

a bond that can be redeemed before maturity

Question 9

what is a convertible bond

Answer 9

a bond that is convertible to other things, usually stock

Question 10

What is a deep discount/zero interest bond

Answer 10

bonds that don’t have interest but are sold at a discount

Question 11

What is a revenue bond

Answer 11

a bond where interest is paid from a specified revenue source

Question 12

what is an income bond

Answer 12

a bond that pays no interest unless the issuing company is profitable

Question 13

What is the stated (coupon or nominal rate)

Answer 13

the rate written in the terms of the bond and the amount of interest that will be paid off

Question 14

what is a market (effective or yeild) rate

Answer 14

this is the prevailing interest rate for similar bonds in the market

Question 15

What are the factors that affect the selling price of the bond

Answer 15

• supply and demand
  -relative risk
  -market conditions and economy

Question 16

what happens if stated rate < market

Answer 16

discount

Question 17

what happens if stated rate > market

Answer 17

premium

Question 18

How is the selling price of a bond calculated

Answer 18

determining present value of its expected future cash flows

Question 19

how do you calculate the bond interest payment

Answer 19

FV X Stated

Question 20

how do you calculate the bond interest expense

Answer 20

carrying value X market rate

Question 21

the difference between interest payment and interest expense is?

Answer 21

amortization amount

Question 22

what is it called when a company pays bond off before maturity

Answer 22

extinguishment of debt

Question 23

what is the amount paid to buy back the bond called

Answer 23

reacquisition price

Question 24

when is there a gain on the extinguishment of debt

Answer 24

net carrying > requisition price

Question 25

when is there a loss on estinguishment

Answer 25

when the net carrying amount is less than reacquisition price

Question 26

What happens when a note is issued at zero bearing interest

Answer 26

the discount is amortized to interest expense over the life of the note

Question 27

what is the journal entry to ammortize discount for a zero interest bearing note

Answer 27

interest expense discount on note payable

Question 28

What is a mortgage note payable

Answer 28

a note that pledges title to property if not payed

Question 29

what is the journal entry for mortgage installment

Answer 29

note payable cash interest expense discount on notes payable

Question 30

What is troubled debt restructuring

Answer 30

occurs when the creditors grant concession to the debtor *usually because debtor cant pay

Question 31

What are the two types of debt restructure

Answer 31

1.) settlement of debt at less than the carrying amount 2.) modification of terms

Question 32

What can settlement of debt involve

Answer 32

- transfer of non-cash asset - issuance of the debtors stock

Question 33

how would a creditor journalize the settlement of debt - asset exchange

Answer 33

asset gained AFDA Note Receivable

Question 34

how would a debtor journalize the settlement of debt - asset exchange

Answer 34

Note Payable Loss on Asset Gain on Restructuring Asset

Question 35

How would a creditor journalize a settlement of debt - equity interest

Answer 35

Equity Investment AFDA Note Receivable

Question 36

how would a debtor journalize a settlement of debt - equity interest

Answer 36

Note Payable Common Stock PIC Gain on Restructuring

Question 37

What are the possible modifications of terms a creditor can grant a debtor

Answer 37

1.) reduction of the stated rate 2.) extension of maturity date 3.) reduction of face amount 4.) reduction or deferral of any accrued interest

Question 38

When does a debtor recognize a gain due to a modification of terms

Answer 38

When FCF are greater than Carrying Balance