| Bond | Written promise to pay the bond’s par (or face) value and interest at a stated contract rate; often issued in denominations of $1,000.
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| Bond indenture | Contract between the bond issuer and the bondholders; identifies the parties’ rights and obligations.
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| Bond sinking fund | A fund designed to accumulate assets to pay a bond’s maturity value.
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| Call option | The right of a bond issuer to retire bonds early.
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| Callable bonds | Bonds that give the issuer the option to retire them at a stated amount prior to maturity.
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| Carrying (book) value of bonds | Net amount at which bonds are reported on the balance sheet; equals the par value of the bonds less any unamortized discount or plus any unamortized premium; also called carrying amount or book value.
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| Contract rate | Interest rate specified in a bond indenture (or note); multiplied by the par value to determine the interest paid each period; also called coupon rate, stated rate, or nominal rate.
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| Convertible bonds | Bonds that bondholders can exchange for a set number of the issuer’s shares.
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| Debt-to-equity ratio | Defined as total liabilities divided by total equity; shows the proportion of a company financed by nonowners (creditors) in comparison with that financed by owners.
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| Discount on bonds payable | Difference between a bond’s par value and its lower issue price or carrying value; occurs when the contract rate is less than the market rate.
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| Effective interest method | Allocates interest expense over the bond life to yield a constant rate of interest; interest expense for a period is found by multiplying the balance of the liability at the beginning of the period by the bond market rate at issuance; also called interest method.
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| Installment note | Liability requiring a series of periodic payments to the lender.
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| Lease | Contract specifying the rental of property.
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| Market rate | Interest rate that borrowers are willing to pay and lenders are willing to accept for a specific lending agreement given the borrowers’ risk level.
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| Mortgage | Legal loan agreement that protects a lender by giving the lender the right to be paid from the cash proceeds from the sale of a borrower’s assets identified in the mortgage.
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| Par value of a bond | Amount the bond issuer agrees to pay at maturity and the amount on which cash interest payments are based; also called face amount or face value of a bond.
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| Premium on bonds | Difference between a bond’s par value and its higher carrying value; occurs when the contract rate is higher than the market rate; also called bond premium.
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| Secured bonds | Bonds that have specific assets of the issuer pledged as collateral.
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| Serial bonds | Bonds consisting of separate amounts that mature at different dates.
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| Straight-line bond amortization | Method allocating an equal amount of bond interest expense to each period of the bond life.
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| Term bonds | Bonds scheduled for payment (maturity) at a single specified date.
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| Unsecured bonds | Bonds backed only by the issuer’s credit standing; almost always riskier than secured bonds; also called debentures.
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