Definitions of Terms

Amortization

The process of allocating an amount to expense over the periods benefited.

Bond

A written agreement whereby a borrower agrees to pay a sum of money at a designated future date plus periodic interest payments at the stated rate.

Bond issue costs

Costs related to issuing a bond (i.e., legal, accounting, underwriting fees, and printing and registration costs).

Bonds outstanding method

The method of accounting for serial bonds that assumes the discount or premium applicable to each bond of the issue is the same dollar amount per bond per year.

Book value approach

The method of recording the stock issued from a bond conversion at the carrying value of the bonds converted.

Callable bond

A bond in that the issuer reserves the right to call and retire the bond prior to its maturity.

Carrying value

The face amount of a debt issue increased or decreased by the applicable unamortized premium or discount plus unamortized issue costs.

Collateral

Asset(s) pledged to settle the obligation to repay a loan, if not repaid.

Convertible debt

Debt that may be converted into common stock at the holder's option after specific criteria are met.

Covenant

A clause in a debt contract written for the protection of the lender that outlines the rights and actions of the parties involved when certain conditions occur (e.g., when the debtor's current ratio declines beyond a specified level).

Debenture

Long-term debt not secured by collateral.

Defeasance

Extinguishment of debt by creating a trust to service it.

Discount

Created when a debt instrument sells for less than face value and occurs when the stated rate on the instrument is less than the market rate at the time of issue.

Effective interest method

The method of amortizing the discount or premium to interest expense so as to result in a constant rate of interest when applied to the amount of debt outstanding at the beginning of any given period.

Effective rate

See Market rate.

Face value

The stated amount or principal due on the maturity date.

Imputation

The process of interest rate approximation that is accomplished by examining the circumstances under which the note was issued.

Long-term debt

Probable future sacrifices of economic benefits arising from present obligations that are not currently payable within one year or the operating cycle of the business, whichever is longer.

Market rate

The current rate of interest available for obligations issued under the same terms and conditions.

Market value approach

The method of recording the stock issued from a bond conversion at the current market price of the bonds converted or the stock issued.

Maturity date

The date on which the face value (principal) of the bond or note becomes due.

Maturity value

See Face value.

Premium

Created when a debt instrument sells for more than its face value and occurs when the stated rate on the instrument is greater than the market rate at the time of issue.

Principal

See Face value.

Secured debt

Debt that has collateral to satisfy the obligation (i.e., a mortgage on specific property), if not repaid.

Serial bond

Debt whose face value matures in installments.

Stated rate

The interest rate written on the face of the debt instrument.

Straight-line method

The method of amortizing the premium or discount to interest expense such that there is an even allocation of interest expense over the life of the debt.

Take-or-pay contract

A contract in which a purchaser of goods agrees to pay specified fixed or minimum amounts periodically in return for products, even if delivery is not taken. It results from a project financing arrangement where the project produces the products.

Throughput agreement

An agreement similar to a take-or-pay contract except that a service is provided by the project under the financing arrangement.

Troubled debt restructure

Occurs when the creditor, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor (deferment or reduction of interest or principal) that it would not otherwise consider.

Unconditional purchase obligation

An obligation to transfer a fixed or minimum amount of funds in the future or to transfer goods or services at fixed or minimum prices.

Yield rate

See Market rate.