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Acct final chp 8-11
|I the process used to determine the amount of intrest to be recorded in each of the periods the liability is outstanding.
|Effective Intrest Rate Method
|is based on compound intrest calculations.
|represents a simple approximation of effective intrest amortizatiom. This method can be used if it produces approximatly the same numerical results as the effective method.
|When a company borrows money from a bank it typically signs a formal agreement or contract called a note, frequently notes are issued in exchange for a noncash asset such as equipment.
|is a type of note which requires the issuing entitiy to pay the face value of the bond to the holder when it matures and usually to pay intrest periodicallyat a specific rate.
|example of Bonds
|rather than try to find a single bank willing and able to lend 800,000,000 at a reasonable intrest ratem corporations typically find it easier and more economical to issue 800,000 bonds with a 1,000 face value
|Face Value/Par value/principal
|all such contracts require the borrower to repay the face value which lets say u bought a car for 800 bucks thats the face value.
|the face value is repaid at this time, which is a specific date in the future.
|coupon notes/coupon debentures/coupon bonds
|when intrest payments were made when a bondholder detached a coupon from the debt contract and mailed it to the company on the intrest payment date these obligations are called....?
|the required intrest payments are called?
|Stated Rate/coupon rate/contract rate
|The amount each intrest payment can be calculated from the face value x intrest rate x payments per yr.
|example of stated rate
|a countract with face value of 1,000- a stated intrest rate of 8 percent- and semiannally = (1000x.08x6/12=40) so 40 dollars is the intrest paid semiannually
|has some collateral pledged against the corporations ability to pay.for example morgage bonds are secured by real estate
|Unsecured Bonds/also called debenture bonds
|there is no collateral, instead the lender is relying on the general credit of the corporation, for ex if the borrower should go bankrupt the secured bond holders would be paid first before the unsecured.
|are unsecured bonds where the risk of the borrower failing to make the payments is realtivly high, ppl take theses chances because theres a very high intrest rate to compensate for the risks.
|givee the borrower the right to pay off or call the bonds prior to their due date,
|allow the bondholderto convert the bond into another security-typically common stock
|convertible bond ex
|each 1000 bond may be convertible vertible into 20 shares of common stock in this case bondholders will convert when the value of the 20 shares vecomes more attractive thatn the intrest payments and repayment of the 1000 principal.
|the rate of intrest demanded by creditors this is a function of economic factors and the creditworthiness of the borrower.
|if yeild is equal to stated rate
|sell for face value or par, sold at par
|if yeild is less than stated rate
|bonds represents good investments bc the intrest payments are higher than the market, sold at premium
|if yeild is more than stated rate
|the bellow market intrest payments will drive the selling price bellow the face value. sold at discount
|some investors who dont want to recieve cash intrest payments (No intrest payment) debt.
|deep discount coupon
|zero coupon bonds, bonds bc of the substantial discount necessarilly to sell these bonds.