Glossary—Chapter 14
bearer (coupon) bonds Bonds without the name of the owner, which may be transferred from one owner
to another by mere delivery. (p. 785).
bond discount The difference between the face value of a bond and its selling price when the bond sells for
less than face value. (p. 787).
bond indenture A contract for a bond that represents a promise to pay a sum of money at a designated
maturity rate, plus periodic interest at a specified rate on the maturity amount (face value). (p. 784).
bond premium The difference between the face value of a bond and its selling price when the bond sells
for more than face value. (p. 787).
callable bonds Bonds that give the issuer the right to call and retire the bonds prior to maturity. (p. 785).
carrying value The face amount of a bond minus any unamortized discount, or plus any unamortized
premium. Synonymous with the term book value. (p. 791).
commodity-backed bonds Bonds that are redeemable in measures of a commodity (e.g., barrels of oil,
tons of coal, or ounces of rare metal). Also called asset-linked bonds. The accounting problem for such
bonds is to project their maturity value in markets where commodity prices fluctuate. (p. 785).
convertible bonds Bonds that permit holders to exchange them for (“convert them to”) other securities of a
corporation (typically common stock) for a specified time after issuance. (p. 785).
debenture bonds Unsecured bonds, which are issued against the general credit of the borrower (issuer). (p.
785).
debt to total assets ratio Coverage ratio that measures the percentage of the total assets provided by
creditors. Computed as total debt divided by total assets. The higher the percentage of debt to total assets,
the greater the risk that the company may be unable to meet its maturing obligations. (p. 808).
deep-discount (zero-interest) debenture bonds Long-term, unsecured debt securities that do not bear
interest. They are sold at a discount that provides the buyer’s total interest payoff at maturity. Also called
zero-interest debenture bonds. (p. 785).
effective-interest method The preferred procedure for computing the amortization of a discount or
premium. Under this method, companies compute bond interest expense (revenue) at the beginning of the
period by the effective-interest rate) and then subtract bond interest paid (calculated as the face amount of
the bonds times the stated interest rate); the result is the amortization amount. (p. 791).
effective yield, or market rate The rate of interest the bondholders actually earn on a bond (and which
takes into account the frequency of compounding). If bonds sell at a discount, the effective yield exceeds
the stated rate; if bonds sell at a premium, the effective yield is lower than the stated rate. (p. 787).
extinguishment of debt The payment of debt. If a company holds a debt security to maturity, it does not
compute any gains or losses; the carrying amount will equal the maturity (face) value of the bond. If a
company extinguishes debt prior to maturity, it must calculate any gain or loss from extinguishment and
report such gain or loss in net income. (p. 795).
face, par, principal, or maturity value On a bond, the amount of capital that must be repaid at maturity.
The terms face value, par value, principal amount, or maturity value are used interchangeably. (p. 786).
fair value option The recording of financial assets or financial liabilities at fair value, with unrealized
holding gains and losses reported as part of net income. (p. 803).
imputation The process of interest-rate approximation, which occurs when a company cannot determine
the fair value of the property, goods, services, or other rights, and if the note has no ready market. (p. 801).
imputed interest rate The result of interest-rate approximation, which occurs when a company cannot
determine the fair value of the property, goods, services, or other rights, and if the note has no ready
market. (p. 801).
income bonds Bonds that pay no interest unless the issuing company is profitable. (p. 785).
long-term debt Probable future sacrifices of economic benefits arising from present obligations that are
not payable within a year or the operating cycle of the company, whichever is longer. Examples are: bonds
payable, long-term notes payable, mortgages payable, pension liabilities, and lease liabilities. (p. 784).
long-term notes payable Similar in substance, in that both have fixed maturity dates and carry a stated or
implicit interest rate, but notes do not trade as readily as bonds in the organized public securities market. (p.
797).
mortgage notes payable A promissory note secured by a document called a mortgage, which pledges title
to property as security for the loan. (p. 802).
off–balance-sheet financing Borrowing funds in a way that avoids recording the obligations. Examples of
such arrangements are nonconsolidated subsidiaries, special purpose entities, and operating leases.
Companies engage in off–balance-sheet financing as a way to remove debt from the balance sheet or
bypass loan covenants. In response to off–balance-sheet financing gone bad (e.g., Enron), the FASB has
tightened the rules that allow off-balance sheet accounting and increased disclosure (note) requirements
related to this type of financing. (p. 804).
refunding The replacement of an existing bond issue with a new one. A company may find it advantageous
to acquire its entire outstanding bond issue and replace it with a new bond issue bearing a lower rate of
interest. The company should recognize as income the gain from the refunding in the period of redemption.
(p. 796).
registered bonds Bonds issued in the name of the owner. At redemption or in a sale of the bond, they
require surrender of the certificate. (p. 785).
revenue bonds Bonds that pay interest from specified revenue sources (e.g., airports, school districts,
counties, toll-road authorities, and governmental bodies). (p. 785).
secured bonds Bonds backed by a pledge of some sort of collateral. For example, mortgage bonds are
secured by a claim on real estate; collateral trust bonds are secured by stocks and bonds of other
corporations. (p. 785).
serial bonds Bond issues that mature in installments. School or sanitary districts, municipalities, or other
local taxing bodies that receive money through a special levy frequently use serially maturing bonds. (p.
785).
special-purpose entity (SPE) A legal entity created to perform a special activity (issue securities, complete
a project, perform R&D activities). The company that creates the SPE guarantees that it or some outside
party will eventually perform the activity. Use of the SPE enables the company that created it to avoid
reporting any assets or liabilities related to the activities on its balance sheet. (p. 804).
stated, coupon, or nominal rate The interest rate written in the terms of the bond indenture (and often
printed on the bond certificate). The issuer of the bonds sets this rate, expressed as a percentage of the
bond’s face value. (p. 786).
straight-line method Method for computing bond amortization. Under the straight-line method, companies
amortize a constant amount each year. Although the FASB recommends the effective-interest method,
companies may use a straight-line method if the results obtained are not materially different from those
produced by the effective-interest method. (p. 789).
term bonds Bond issues that mature on a single date. (p. 785).
times interest earned ratio Solvency ratio that indicates the company’s ability to meet interest payments
as they come due. Computed as income before income taxes and interest expense divided by interest
expense. (p. 808).
zero-interest debenture bonds Long-term, unsecured debt securities that do not bear interest. They are
sold at a discount that provides the buyer’s total interest payoff at maturity. Also called deep-discount
bonds. (p. 785).
Appendix 14A:
troubled-debt restructuring Occurs when a creditor grants to the debtor, due to the debtor’s financial
difficulties, concessions that it would not otherwise consider. A troubled-debt restructuring involves either
(1) settlement of debt at less than its carrying amount, or (2) continuation of debt with a modification of
terms. (p. 811).