Interest that has been collected on a loan by a lending institution but has not yet been counted as income (or earnings). Instead, it is initially recorded as a liability. If the loan is paid off early, the unearned interest portion must be returned to the borrower. Also called "unearned discount". |||Unearned interest is an accounting method used by lending institutions to deal with long-term, fixed-income securities. Initially recorded as a liability, the unearned interest will eventually be recorded as income in the lending institution's books over the life of the loan as time passes and the interest is earned.
Interest that has been collected on a loan by a lending institution but has not yet been counted as income (or earnings). Instead, it is initially recorded as a liability. If the loan is paid off early, the unearned interest portion must be returned to the borrower. Also called unearned interest. |||An unearned discount account recognizes interest deductions before being classified as income earned throughout the term of the outstanding debt. Over time, then, the unearned discount creates an increase in the lender’s profit and a subsequent decrease in liability.
In municipal bonds, underlying debt relates to an implicit understanding that the debt of smaller governmental entities might also be backed by the creditworthiness of larger governmental entities in the jurisdiction. On their own, these smaller entities might have a difficult time raising funds if they did not have a robust financial position. However, the implicit backing of larger entities facilitates borrowing by smaller entities and allows them obtain lower interest rates on their debts. The municipal bonds would be considered the underlying debt. |||This situation of smaller municipal debts being implicitly backed by larger governmental entities is quite common in practice. This occurs where smaller entities like cities and school districts offer bonds to the public to finance operations and new initiatives. If a smaller entity is unable to repay its debts, it is unlikely that the city or school district will simply be allowed to become insolvent and cease operations. Rather it is expected that the state will intervene to provide emergency funding to continue debt service and maintain essential services.
A government bond that has no maturity date, and pays interest in perpetuity. While the government can redeem an undated issue if it so chooses, since most existing undated issues have very low coupons, there is little or no incentive for redemption. Undated issues are treated as equity for all practical purposes due to their perpetual nature, and are also known as perpetual bonds. |||Perhaps the best-known undated issues are the U.K. Government's undated bonds or gilts, of which there are eight issues in existence, some of which date back to the 19th Century. The largest of these issues presently is the War Loan, with an issue size of £1.9 billion and a coupon rate of 3.5% that was issued in the early 20th century.
A credit facility with no restrictions placed upon the lending institution regarding the amount of funds to be lent. |||Under this arrangement, the lending institution is not under any obligation to provide a specific sum to the borrowing company. Furthermore, the borrowing company is not subject to conditions set by the lending institution.
The act of lending money at an interest rate higher than that permitted by law. |||This is an illegal practice. Different regions have prescribed interest rates that cannot be exceeded.
A loan or security that ranks above other loans or securities with regard to claims on assets or earnings. Also known as a senior security. |||In the case of default, creditors with unsubordinated debt would get paid out in full before the junior debt holders. Therefore, unsubordinated debt is less risky than subordinated debt.
A loan that is not secured by the issuer's assets. Unsecured notes are similar to debentures but offer a higher rate of return with less security than a debenture. Such notes are also often uninsured and subordinated. The note is structured for a fixed period of time. |||Companies sell unsecured notes through private offerings to generate money for corporate initiatives such as share repurchases and acquisitions. An unsecured note is not backed by any collateral and therefore presents the most risk to lenders (investors in the notes). Due to the higher risk involved, the interest rates on these notes are higher than with secured notes.
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