Concept explainers
a)
To discuss: The word indenture related with long term debt.
a)
Explanation of Solution
Indenture is an agreement among issuing company and lenders in the obligation of debt stipulating the nature of issue of debt, the way in which principal should be settled, and limitations placed on the company by financiers.
b)
To discuss: The word trustee related with long term debt.
b)
Explanation of Solution
Trustee can be considered as representatives of bondholders in public debt offering. The trustee is accountable for evaluating borrower’s obedience with the terms of indenture.
c)
To discuss: The word call feature related with long term debt.
c)
Explanation of Solution
Call feature is a facility that allows the issuer of bonds to give up the responsibility before its maturity.
d)
To discuss: The word sinking fund related with long term debt.
d)
Explanation of Solution
Sinking fund is a technique of delivering for the slow superannuation of a bond issue. The sinking fund requisite must be encountered by investing a particular quantity of cash yearly in a sinking fund account. Otherwise, the company can either buy a part of the debt every year in the open market or, when the debt is callable, utilize a lottery method to define which real bonds will be called and discharged every year.
e)
To discuss: The word conversion feature related with long term debt.
e)
Explanation of Solution
Conversion character is a facility that permits the holder of the bond to convert the bond for stocks of the firm’s common stock at the choice of the holder.
f)
To discuss: The word coupon rate related with long term debt.
f)
Explanation of Solution
Coupon rate is the yearly interest rate rewarded to the bondholders. It stated as a percentage of face value.
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Chapter 6 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
- Debt Instrument investment can be classified under the following, Except? FAFVPL At Amortized Cost FAFVOCI Held to Maturityarrow_forwardInterest expense on short term debt should be based on projected balances and short term interest rates. True or Falsearrow_forwardDefine long-term debtarrow_forward
- What is the effective interest rate of a bond or other debt instrument measured at amortized cost? Select the correct response: The interest rate currently charged by the entity or by others for similar debt instruments (i.e., similar remaining maturity, cash flow pattern, currency, credit risk, collateral, and interest basis). The interest rate that exactly discounts estimated future cash payments or receipts through the expected life of the debt instrument or, when appropriate, a shorter period to the net carrying amount of the instrument. The basic, risk-free interest rate that is derived from observable government bond prices The stated coupon rate of the debt instrument.arrow_forwardCalculate market value of debtarrow_forwardThe debt ratio is used primarily as a measure of: Short-term liquidity. Profitability. Creditors' long-term risk. Return on Investment.arrow_forward
- Which one of the proportions of debt in the following chart is the optimal level? Firm Value Vu+ TD A B OD OC A B C -Vu + TD - Financial Distress Costs D Proportion of Debtarrow_forwardYield on the debtarrow_forwardMatching Select the term that best fits each of the following definitions and descriptions. a. Long-term debt b. Callable bonds c. Troubled debt restructuring d. Serial bonds e. Commodity-backed bonds f. Term bonds g. Convertible bonds h. Bond indenture i. Straight-line method j. Off-balance-sheet financing k. Stated interest rate l. Bond discount m. Zero-interest bonds n. Early extinguishment of debt o. Debenture bonds p. Junk bonds q. Bearer bonds r. Registered bonds s. Bond issuance costs t. Secured bonds 32. Provides for recognition of an equal amount of premium or discount amortization each period. 33. Bonds that mature in one lump sum at a specified future date. 34. Bonds that provide for conversion into some other security at the option of the stockholder. 35. Bonds that mature in a series of installments at future dates. 36.…arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning