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Foundations of Financial Management 6/c/e
Foundations of Financial Management, 6/e
Stanley B. Block, Texas Christian University
Geoffrey A. Hirt, DePaul University and Mesirow Financial
J. Douglas Short, Northern Alberta Institute of Technology

Long-Term Debt and Lease Financing

Below are the key terms featured in this chapter. The textbook's full glossary is also available for online searching.

absolute priority rule  Under the bankruptcy act, all senior claims on asset value must be settled in full before any value can be given to a junior claimant.
(See Refer to page 602)
after-acquired property clause  Property purchased is placed under the original mortgage if purchased after the mortgage is executed.
(See Refer to page 563)
assignment  The liquidation of assets without going through formal court procedures. To effect an assignment, creditors must agree on liquidation values and the relative priority of claims.
(See Refer to page 601)
bankruptcy  The market value of a firm's assets are less than its liabilities, and the firm has a negative net worth. The term is also used to describe in-court procedures associated with the reorganization or liquidation of a firm.
(See Refer to page 600)
bond indenture  (See indenture.)
(See Refer to page 562)
bond ratings  Bonds are rated according to risk by Dominion Bond Rating Services and Standard and Poor's Rating Service. A bond that is rated AAA has the lowest risk, while a bond with a C rating has the highest risk. Coupon rates are greatly influenced by a corporation's bond rating.
(See Refer to page 570)
call feature  Used for bonds and some preferred stock. A call or redemption feature, written into a bond indenture, allows the corporation to retire securities before maturity by forcing the bondholders to sell bonds back to it at a set price.
(See Refer to pages 567, 623)
capital (or financing) lease  A long-term, noncancellable lease that has many of the characteristics of debt. Under CICA guidelines, the lease obligation must be shown directly on the balance sheet.
(See Refer to page 583)
composition  An out-of-court settlement in which creditors agree to accept a fractional settlement on their original claim.
(See Refer to page 600)
conversion  The process of swapping one security for common shares in a corporation.
(See Refer to page 567)
coupon rate  The actual interest rate on the bond, usually payable in semiannual installments. The coupon rate normally stays constant during the life of the bond and indicates what the bondholder's annual dollar income will be.
(See Refer to page 562)
creditor committee  A group of creditors established to run a business to avoid bankruptcy.
(See Refer to page 600)
current yield  The yearly dollar interest payment divided by the current market price.
(See Refer to page 570)
debenture  A long-term unsecured corporate bond. Debentures are usually issued by large, prestigious firms having excellent credit ratings in the financial community.
(See Refer to page 564)
Eurobonds  Bonds payable or denominated in the borrower's currency but sold outside the country of the borrower, usually by an international syndicate.
(See Refer to pages 579, 762)
extension  An out-of-court settlement in which creditors agree to allow the firm more time to meet its financial obligations. A new repayment schedule is developed, subject to the acceptance of creditors.
(See Refer to page 600)
external reorganization  A reorganization under the formal bankruptcy laws in which a merger partner is found for the distressed firm. Ideally, the distressed firm should be merged with a strong firm in its own industry, although this is not always possible.
(See Refer to page 603)
floating rate bond  The interest payment on the bond that changes with market conditions, rather than the price of the bond.
(See Refer to page 578)
internal reorganization  A reorganization under the formal bankruptcy laws. New management may be brought in and a redesign of the capital structure may be implemented.
(See Refer to page 602)
junk bond  A bond that is not in default, but one that is of questionable quality and speculative in nature.
(See Refer to page 564)
leveraged lease  The lessor for a large capital item may finance a portion with a loan from a financial institution.
(See Refer to page 584)
liquidation  A procedure that may be carried out under the formal bankruptcy laws when an internal or external reorganization does not appear to be feasible and it appears that the assets are worth more in liquidation than through a reorganization. Priority of claims becomes extremely important in liquidation because it is unlikely that all parties will be fully satisfied in their demands.
(See Refer to page 603)
maturity date  The date on which the bond is retired and the principal (par value) is repaid to the lender.
(See Refer to page 562)
medium-term notes  These debt instruments are like bonds but of a shorter time to maturity and are issued in a quicker manner through a POP prospectus.
(See Refer to page 582)
mortgage agreement  A loan that requires real property (plant and equipment) as collateral.
(See Refer to page 563)
operating lease  A short-term, nonbinding obligation that is easily cancellable.
(See Refer to page 584)
par value  Sometimes referred to as the face value or the principal value of the bond. Most bond issues have a par value of $1,000 per bond. Older issues of common and preferred stock may also have an assigned par value.
(See Refer to pages 562, 624)
real return bond  A financial obligation that promises a coupon payment at a fixed yield above the inflation rate.
(See Refer to page 578)
refunding decision  The process of retiring an old bond issue before maturity and replacing it with a new issue. Refunding occurs when interest rates have fallen and new bonds may be sold at lower interest rates.
(See Refer to page 573)
sale and leaseback  An arrangement whereby a capital item is sold to a financial institution and then leased back from that financial institution. The arrangement may free monies and may allow for more effective use of the tax laws.
(See Refer to page 584)
secured debt (claim)  A general category of debt, which indicates that the loan was obtained by pledging assets as collateral. Secured debt has many forms and usually offers some protective features to a given class of bondholders.
(See Refer to page 562)
serial payments  A bond may be paid off in installments over the life of the issue.
(See Refer to page 565)
sinking-fund provision  A method for retiring bonds in an orderly process over the life of a bond. Each year or semiannually, a corporation sets aside a sum of money equal to a certain percentage of the total issue. These funds are then used by a trustee to purchase the bonds in the open market and retire them. This method prevents the corporation from being forced to raise a large amount of capital at maturity to retire the total bond issue.
(See Refer to page 565)
strip bond  A bond in which the investor only receives the maturity or face value with all coupons removed.
(See Refer to page 577)
subordinated debenture  An unsecured bond in which payment to the holder occurs only after designated senior debenture holders are satisfied.
(See Refer to page 564)
technical insolvency  When a firm is unable to pay its bills as they come due.
(See Refer to page 600)
unsecured debt  A loan that requires no assets as collateral, but allows the bondholder a general claim against the corporation, rather than a lien against specific assets.
(See Refer to page 564)
yield to maturity  The required rate of return on a bond issue. It is the discount rate used in present-valuing future interest payments and the principal payment at maturity. The term is used interchangeably with market rate of interest.
(See Refer to pages 323, 570)
zero-coupon rate bond  A bond that is sold at a deep discount from face value. The return to the investor is the difference between the investor's cost and the face value received at the end of the life of the bond.
(See Refer to page 577)