Chapter 9 Review Questions-Trone PDF

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Chapter 9 Review Questions • • • •

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Financing with debt requires borrowing, whereas financing with equity requires issuing shares of stock. Loans requiring periodic payments of interest and principle are referred to as installment notes. A contract in which an owner provides a user the right to use an asset in return for periodic cash payments over a period of time is called a lease Bonds: o They obligate the issuing company to repay the bonds at a specific date. o They obligate the issuing company to pay a specific amount. In a private placement of bonds, bonds may be sold to a single large investor. The two types of financing are debt financing and equity financing. Periodic payments on installment notes typically include o a portion that reduces the outstanding loan balance. o a portion that reflects interest. term bonds require payment of the full principal amount of the bond at the end of the loan term. A lease is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time Callable bonds can be redeemed at the choice of the bond issuer A formal debt instrument that obligates the borrower to repay a stated amount (referred to as the principal or face amount) at a specified maturity date can be a note or a bond Convertible bonds allow the lender to convert each bond into common stock Most corporate bonds pay interest semiannually secured bonds are supported by a specific asset the issuer pledges as collateral. Bonds that require payment of the full principle amount of the bond at the end of the loan term are referred to as term bonds The rate of interest printed on the face of a bond is referred to as the face interest rate A common reason for redeeming a bond prior to its maturity date is that market interest rates decreased. convertible bonds are retired when the bondholder exchanges them for the issuing company's stock. Bonds may be retired at maturity or retired early. The stated rate of interest is used to compute the cash interest paid to bondholders A series of equal amounts paid or received over equal time periods is called an annuity Bonds will be issued a premium if the stated interest rate is greater than the market interest rate. When a corporation repurchases its bonds from the bondholders, the corporation retires the bonds. Two ratios commonly used to assess a company's financial risk: o Times interest earned ratio o Debt to equity ratio

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Characteristics of an annuity: o A series of amounts that are equal o Equal time periods between payment dates In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's long-term debt The debt to equity and the times interest earned ratios provide investors and creditors with a measure of financial risk....