Chapter 14: Long-term Financial Liabilities

Question 1

Green Bond

Answer 1

Fixed-income instrument that is used to raise money for environmental projects

Question 2

Restrictive Covenants

Answer 2

Terms or conditions that are meant to limit activities and protect both lenders and borrowers

Question 3

Bond indenture

Answer 3

A bond indenture is a promise (by the lender to the borrower) to pay:
a sum of money at the designated date, and
periodic interest (usually paid semi-annually) at a stipulated rate on the face value.
They are traded on public markets.

Question 4

Firm Commitment Underwriting

Answer 4

an investment banker underwrites the whole issue by guaranteeing a certain sum to the corporation thus taking the risk of selling the bonds for whatever price the agent can get

Question 5

Best Efforts Underwriting

Answer 5

when an investment banker will sell as possible of a bond/note payable for a commission

Question 6

Private Placement

Answer 6

place bond privately by selling the bonds directly to a large institution.

Question 7

Registered Bonds

Answer 7

Also called bearer or coupon bonds. issued in the owner’s name. To sell, you reissue a new certificate

Question 8

Secured or Unsecured Debt

Answer 8

Secured is backed by a pledge:
1. mortgage bonds or notes: secured by real estate
2. Collateral trust bonds: secured by shares
Unsecured is not backed by collateral
1. debenture & junk bonds: very risky, pay high interest

Question 9

Term Bonds

Answer 9

issues that mature in instalments, also called serial bonds or notes

Question 10

Perpetual Bonds or notes

Answer 10

unusually long-term i.e. 100 years

Question 11

Income bond

Answer 11

pays no interest unless the company is profitable

Question 12

Revenue bond

Answer 12

type of income bond, but only takes a specific type of revenue

Question 13

deep discount bonds or notes

Answer 13

also called zero-interest debentures, bonds or notes. have little to no interest each year and sold at a large discount, pays total interest payoff

Question 14

Commodity-backed debt

Answer 14

also called asset-linked debt; redeemable in amounts of a commodity such as barrels, oils, coal, metal

Question 15

Callable bonds and notes

Answer 15

give the issuer the right to call and retire the debt before maturity

Question 16

convertible debt

Answer 16

allows the holder or the issuer to convert the debt into other securities such as common shares

Question 17

investment grade rating

Answer 17

high-quality securities and therefore only certain securities qualify

Question 18

Legal Defeasance

Answer 18

if the creditor of the original debt agrees to look to the trust for repayment and give up its claim on the company

Question 19

Defeasance

Answer 19

set aside money in a trust to repay the debt

Question 20

Stated, coupon, or nominal rate

Answer 20

% of the bond’s face value

Question 21

Face value

Answer 21

also called par value, principal amount, maturity value

Question 22

Bond Discount

Answer 22

bond sells for less than their face value

Question 23

Premium Bond

Answer 23

bond sells for more than their face value

Question 24

effective yield or market rate or Yield Rate

Answer 24

interest rate earned by bondholders
1. discount: effective yield > stated rate
2. Premium: Effective yield<stated rate

Question 25

2 Methods to amortize a discount/premium

Answer 25

IFRS: Effective Interest Method ASPE: Straight-line Method

Question 26

Effective Interest Method (Formula)

Answer 26

Interest Expense - Interest Paid = Amortization Amount Interest Expense: CA of debt at the beginning of period * effective interest rate Interest Paid: Face amount of debt * stated interest rate

Question 27

Marketable Securities

Answer 27

issued for cash, FV is cash received by issuer

Question 28

Imputed interest rate

Answer 28

rate that makes the cash that is received now equal to the present value of the amounts that will be paid in the future. Amortization: Face - PV

Question 29

Fair Value Option

Answer 29

L-T Debt is measured at amortized cost ASPE: Allows L-T debt to be measured at Fair-Value; changes in FV are recognized in Net Income IFRS: only used where FV is more relevant

Question 30

Derecognition of debt

Answer 30

No gain or loss is recognized as CA=Maturity level

Question 31

Extinguishment of debt

Answer 31

1. debtor discharges the liability by paying the creditor 2. debtor is legally released from primary responsibility for the liability by law

Question 32

Reacquisition Price

Answer 32

amount paid on: 1. extinguishment before maturity (Call premium + Expense of reacquisition) 2. Early Repayment

Question 33

Refunding of L-T Debt

Answer 33

replacement of an existing issuance with a new one

Question 34

Troubled Debt Restructuring

Answer 34

occurs when, for an economic or legal reason that are related to the debtor's financial difficulties. A concession is offered to the debtor

Question 34

Debt Settlement

Answer 34

when the debt is settled, meaning there is early repayment or refunding

Question 34

Loan foreclosure

Answer 34

forcing the debtor to transfer the asset if it has a legal charge on the asset

Question 35

Settlement

Answer 35

old liability is eliminated and a new liability is assumed

Question 36

Non-substantial Modification of Terms

Answer 36

ASPE: new effective interest rate is imputed by equating the CA of original debt w/ present value of the revised cash flow IFRS: Discounting New Cash Flows at the original effective interest rate

Question 37

in-substance defeasance

Answer 37

either the lender is not notified of Defeasance OR lender refuses

Question 38

Off-balance Sheet Financing

Answer 38

structures a financing deal that results in obligations not being recorded as debt on the statement of financial position

Question 39

Types of off-balance sheet financing

Answer 39

Non-consolidated entities, Special Purpose Entities or variable interest entity, operating leases

Question 40

Non-consolidated entities

Answer 40

when a company does not own more than 50%

Question 41

Special Purpose Entity

Answer 41

A company is created to perform a special project or function

Question 42

Securization

Answer 42

the company then sells the assets to a special purpose entity in return for cash. Investors invest in a special purpose entity to benefit from the return on the assets and certain tax advantages

Question 43

Solvency

Answer 43

ability to pay interest as it comes due and to repay the face value of debt at maturity

Question 44

Debt to total assets

Answer 44

total debt / total assets

Question 45

What is a par value?

Answer 45

Par value for a L-T debt is when the effective (market) rate is the same as the stated rate