Understanding Long-term Liabilities & Bonds: Definitions, Features, & Rate Relationships, Quizzes of Financial Accounting

Download Understanding Long-term Liabilities & Bonds: Definitions, Features, & Rate Relationships and more Quizzes Financial Accounting in PDF only on Docsity! TERM 1 Long-term Liabilities DEFINITION 1 is any obligation of a business that is expected to be satisfied or paid in more than one year. the type and size can vary across companies .the most common and largest often arise from borrowing money TERM 2 Bonds DEFINITION 2 a financial instrument in which a borrower promises to pay future interest and principal to a creditor in exchange for the creditor's cash today. (basically borrowing money and paying it back later) pay interests once or twice a year and at maturity pay the face value Borrower "sells" or "issues" the bond and records a liability. Creditor "buys" the bond and records on investment. TERM 3 Bond features DEFINITION 3 Secured bonds - have specific assets pledged as collateral, unsecured do not. Unsecured bonds are often called debenture bonds. (Secured bonds have lower interest rate) Convertible bonds - may be converted into common stock at the bond holder's option. Callable bonds - are subject to retirement at a stated dollar amount prior to maturity. Junk bonds - are unsecured bonds that pay high interest but are very risky. TERM 4 Bond Terms DEFINITION 4 Face value - the amount that is repaid at maturity of a bond. Stated Interest Rate - the contractual rate at which interest is paid to the creditor. Maturity Date - the date on which the face value must be repaid to the creditor. Market (or effective or yield) rate of interest - the rate of return that investors in the bond markets demand for a bond of similar risk. TERM 5 Bond Rate Relationship (discount) DEFINITION 5 bond pay interest at a rate lower than what creditors demand, creditors will any purchase if discount. By discounting it the borrower is increase the rate of interest that creditors own. They reduced enough the effective interest rate that creditors own equals the market rate of interest. Bond issued for less than face value are discount. yield > stated rate ; interest expense > interests paid TERM 6 Bond Rate Relationship (premium) DEFINITION 6 bond pay interest at a higher rate than what creditors demand, the borrower will sell the bond only if the price is raised. by raising the price the borrower lowers the rate of interest that the creditor earn. They raised enough the effective interest rate that creditors own equals the market rate of interest. bonds issued for more than faced value are issued at premium. yield< stated Rate ; interest Expense < Interest Paid TERM 7 Issuance DEFINITION 7 cash received when the bonds are issued (the issue or selling price) TERM 8 interest DEFINITION 8 the interest payments TERM 9 Repayment DEFINITION 9 the repayment of the principal (or face value) at maturity. TERM 10 Any premium or discount is recorded in separate account are called DEFINITION 10 Premium on Bonds Payable or Discount on Bonds Payable