Deck 12: Long-Term Liabilities: Bonds and Notes

Question 1

The market rate of interest is affected by a variety of factors, including investors' assessment of current economic conditions.

Answer 1

True

Question 2

If $500,000 of 10-year bonds, with interest payable semiannually, are sold for $494,040 based on (1) the present value of $500,000 due in 20 periods at 5% plus (2) the present value of twenty, $25,000 payments at 5%, the nominal or contract rate and the market rate of interest for the bonds are both 10%.

Answer 2

False

Question 3

A bond is usually divided into a number of individual bonds of $500 each.

Answer 3

False

Question 4

A secured bond is called a debenture bond and is backed only by the general creditworthiness of the corporation.

Question 5

The present value of the periodic bond interest payments is the value today of the amount of interest to be received at the end of each interest period.

Question 6

When the market rate of interest is less than the contract rate for a bond, the bond will sell for a premium.

Question 7

Bondholders are creditors of the issuing corporation.

Question 8

If the bondholder has the right to exchange a bond for shares of common stock, the bond is called a convertible bond.

Question 9

When a corporation issues bonds, it executes a contract with the bondholders, known as a bond debenture.

Question 10

The present value of an annuity is the sum of the present values of each cash flow.

Question 11

The face value of a term bond is payable at a single specific date in the future.

Question 12

An equal stream of periodic payments is called an annuity.

Question 13

The face value of bonds is quoted as a percentage of the bonds' market value.

Question 14

Bondholders claims on the assets of the corporation rank ahead of stockholders.

Question 15

The concept of present value is that an amount of cash to be received at some date in the future is the equivalent of the same amount of cash held at an earlier date.

Question 16

Bonds of major corporations are traded on bond exchanges.

Question 17

The present value of $5,000 to be received in 4 years at a market rate of interest of 6% compounded annually is $3,636.30.

Question 18

A bond is simply a form of an interest bearing note.

Question 19

The buyer determines how much to pay for bonds by computing the present value of future cash receipts using the contract rate of interest.

Question 20

Bonds are sold at face value when the contract rate is equal to the market rate of interest.

Question 21

If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928, the annual interest expense is $5,500.

Question 22

There are two methods of amortizing a bond discount or premium: the straight-line method and the double-declining-balance method.

Question 23

Premium on bonds payable may be amortized by the straight-line method if the results obtained by its use do materially differ from the results obtained by use of the interest method.

Question 24

Interest payments on 12% bonds with a face value of $20,000 and interest paid semiannually would be $2,400 every 6 months.

Question 25

The total interest expense over the entire life of a bond is equal to the sum of the interest payments plus the total discount or minus the total premium related to the bond.

Question 26

If the market rate of interest is 8% and a corporation's bonds bear interest at 7%, the bonds will sell at a premium.

Question 27

If bonds are sold for a discount, the carrying value of the bonds is equal to the face value less the unamortized discount.

Question 28

To determine the six month interest payment amount on a bond, you would take one-half of the market rate times the face value of the bond.

Question 29

If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable will decrease as the bonds approach maturity.

Question 30

The special fund that is set aside to provide for the payment of bonds at maturity is called a sinking fund.

Question 31

The amortization of a premium on bonds payable decreases bond interest expense.

Question 32

One reason a dollar today is worth more than a dollar 1 year from today is the time value of money.

Question 33

If the straight-line method of amortization of discount on bonds payable is used, the amount of yearly interest expense will increase as the bonds approach maturity.

Question 34

Amortization is the allocation process of writing off bond premiums and discounts to interest expense over the life of the bond issue.

Question 35

If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928, the semiannual straight-line amortization of the premium is $1,416.

Question 36

The issue price of zero-coupon bonds is the present value of their face amount.

Question 37

Zero-coupon bonds do provide for interest payments.

Question 38

The effective-interest method of amortizing a bond discount or premium is the preferred method.

Question 39

The price of a bond is equal to the sum of the interest payments and the face amount of the bonds.

Question 40

The amount of interest expense reported on the income statement will be more than the interest paid to bondholders if the bonds were originally sold at a discount.

Question 41

If bonds of $1,000,000 with unamortized discount of $10,000 are redeemed at 98, the gain on redemption of bonds is $10,000.

Question 42

The balance in a bond discount account should be reported on the balance sheet as a deduction from the related bonds payable.

Question 43

Bonds payable would be listed at their carrying value on the balance sheet.

Question 44

There is a loss on redemption of bonds when bonds are redeemed above carrying value.

Question 45

A corporation often issues callable bonds to protect itself against significant declines in future interest rates.

Question 46

Bonds may be purchased directly from the issuing corporation or through one of the bond exchanges.

Question 47

Both callable and non-callable bonds can be purchased by the issuing corporation in the open market.

Question 48

At 12/31/2009, the cash and securities held in a sinking fund to redeem bonds in 2011 are classified on the balance sheet as current assets.

Question 49

The higher the times interest earned ratio, the better the creditors' protection.

Question 50

Only callable bonds can be purchased by the issuing corporation before maturity.

Question 51

If sinking fund cash is used to purchase investments, those investments are reported on the balance sheet as marketable securities.

Question 52

The unamortized Discount on Bonds Payable account is a contra-liability account.

Question 53

The carrying amount of the bonds is defined as the face value of the bonds plus any unamortized discount or less any unamortized premium.

Question 54

Gains and losses on the redemption of bonds are reported as other income or other expense on the income statement.

Question 55

Callable bonds are redeemable by the issuing corporation within the period of time and at the price stated in the bond indenture.

Question 56

When the effective interest method of amortization is used, the amount of interest expense for a given period is calculated by multiplying the face rate of interest by the bond's carrying value at the beginning of the given period.

Question 57

The times interest earned ratio is calculated by dividing Bonds Payable by Interest Expense.

Question 58

When a portion of a bond issue is redeemed, a related proportion of the unamortized premium or discount must be written off.

Question 59

Callable bonds can be redeemed by the issuing corporation at the fair market price of the bonds.

Question 60

The balance in Premium on Bonds Payable should be reported as a deduction from Bonds Payable on the balance sheet.

Question 61

The effective interest method produces a constant dollar amount of interest expense to be reported each interest period.

Question 62

The interest portion of an installment note payment is computed by multiplying the interest rate by the carrying amount of the note at the end of the period.

Question 63

An unsecured bond is the same as a

A) debenture bond.
B) zero coupon bond.
C) term bond.
D) bond indenture.

Question 64

Debenture bonds are

A) bonds secured by specific assets of the issuing corporation
B) bonds that have a single maturity date
C) issued only by the federal government
D) issued on the general credit of the corporation and do not pledge specific assets as collateral.

Question 65

When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at

A) a premium
B) their face value
C) their maturity value
D) a discount

Question 66

When the maturities of a bond issue are spread over several dates, the bonds are called

A) serial bonds
B) bearer bonds
C) debenture bonds
D) term bonds

Question 67

When there are material differences between the results of using the straight-line method and using the effective interest method of amortization, the effective interest method should be used.

Question 68

One potential advantage of financing corporations through the use of bonds rather than common stock is

A) the interest on bonds must be paid when due
B) the corporation must pay the bonds at maturity
C) the interest expense is deductible for tax purposes by the corporation
D) a higher earnings per share is guaranteed for existing common shareholders

Question 69

When the corporation issuing the bonds has the right to repurchase the bonds prior to the maturity date for a specific price, the bonds are

A) convertible bonds
B) unsecured bonds
C) debenture bonds
D) callable bonds

Question 70

The present value of $30,000 to be received in two years, at 12% compounded annually, is (rounded to nearest dollar)

A) $23,916
B) $37,632
C) $23,700
D) $30,000

Question 71

Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called

A) debentures
B) callable bonds.
C) early retirement bonds.
D) options.

Question 72

If the market rate of interest is 8%, the price of 6% bonds paying interest semiannually with a face value of $250,000 will be

A) Equal to $250,000
B) Greater than $250,000
C) Less than $250,000
D) Greater than or less than $250,000, depending on the maturity date of the bonds

Question 73

Which of the following is not an advantage of issuing bonds instead of common stock?

A) Tax savings result
B) Income to common shareholders may increase.
C) Earnings per share on common stock may be lower.
D) Stockholder control is not affected.

Question 74

A bond indenture is

A) a contract between the corporation issuing the bonds and the underwriters selling the bonds
B) the amount due at the maturity date of the bonds
C) a contract between the corporation issuing the bonds and the bond trustee, who is acting on behalf of the bondholders.
D) the amount for which the corporation can buy back the bonds prior to the maturity date

Question 75

A legal document that indicates the name of the issuer, the face value of the bond and such other data is called

A) trading on the equity.
B) convertible bond.
C) a bond debenture.
D) a bond certificate.

Question 76

The interest rate specified in the bond indenture is called the

A) discount rate
B) contract rate
C) market rate
D) effective rate

Question 77

An installment note is a debt that requires the borrower to make equal periodic payments to the lender for the term of the note.

Question 78

The market interest rate related to a bond is also called the

A) stated interest rate
B) effective interest rate
C) contract interest rate
D) straight-line rate

Question 79

The present value of $40,000 to be received in one year, at 6% compounded annually, is (rounded to nearest dollar)

A) $37,736
B) $42,400
C) $40,000
D) $2,400

Question 80

A corporation issues for cash $9,000,000 of 8%, 25-year bonds, interest payable semiannually. The amount received for the bonds will be

A) present value of 50 semiannual interest payments of $360,000, plus present value of $9,000,000 to be repaid in 25 years
B) present value of 25 annual interest payments of $720,000
C) present value of 25 annual interest payments of $720,000, plus present value of $9,000,000 to be repaid in 25 years
D) present value of $9,000,000 to be repaid in 25 years, less present value of 50 semiannual interest payments of $360,000