Match these terms with their definitions.
-A type of liability which requires the issuing entity to pay the face value to the holder on the maturity date and to pay interest periodically at a specified rate.
A)Bond
B)Contract, coupon, stated rate
C)Discount
D)Effective interest rate method
E)Face value, par value, principal
F)Interest amortization
G)Lease
H)Lessee
I)Lessor
J)Leverage
K)Long-term debt
L)Market rate, yield
M)Maturity
N)Premium
O)Straight-line method

Question

Quizplus · Accepted Answer

A) Bond - A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer.
B) Contract, coupon, stated rate - These terms are related to the bond. The contract is the legal agreement that specifies the terms of the bond. The coupon refers to the interest payments made to the bondholder, and the stated rate is the interest rate that the bond will pay to the bondholder.
C) Discount - This term refers to the situation where a bond is sold for less than its face value. The discount represents the difference between the purchase price and the par (or face) value of the bond.
D) Effective interest rate method - This is a method of amortizing the bond discount or premium over the life of the bond in a way that results in a constant rate of interest over the term of the bond, which is the market rate at the time of issuance.
E) Face value, par value, principal - These terms all refer to the amount that the issuer agrees to repay the bondholder at the maturity date of the bond. It is the original amount of money the bond represents.
F) Interest amortization - This is the process of spreading out the bond discount or premium over the life of the bond. It involves the gradual reduction of the bond discount or premium to reflect the interest expense over the period.
G) Lease - A lease is a contractual arrangement calling for the lessee (user) to pay the lessor (owner) for use of an asset.
H) Lessee - The lessee is the user in a lease agreement who makes payments to the lessor for the right to use the asset.
I) Lessor - The lessor is the owner in a lease agreement who receives payments from the lessee for the use of the asset.
J) Leverage - Leverage refers to the use of various financial instruments or borrowed capital to increase the potential return of an investment.
K) Long-term debt - This is debt that is not due for repayment within the next year. Bonds are an example of long-term debt.
L) Market rate, yield - The market rate, or yield, is the return that investors demand for investing in the bond. It is influenced by various factors including the credit quality of the issuer, the length of the term, and the prevailing interest rates in the economy.
M) Maturity - Maturity refers to the date on which the bond will expire, and the bond issuer will pay the bondholder the face value of the bond.
N) Premium - A premium on a bond occurs when the bond is sold for more than its face value. The premium represents the difference between the purchase price and the par (or face) value of the bond.
O) Straight-line method - This is a method of amortizing the bond discount or premium that results in equal interest expense amounts for each period over the term of the bond.

Match These Terms with Their Definitions