Deck 9: Long-Term Liabilities

Question 1

The stated interest rate is the rate quoted in the bond contract used to calculate the cash payments for interest.

Answer 1

True

Question 2

Bonds are the most common form of corporate debt.

Answer 2

True

Question 3

As a company's default risk increases,investors demand a higher market interest rate on their bond investments.

Answer 3

True

Question 4

Secured bonds are backed by the federal government.

Question 5

A callable bond allows the borrower to repay the bonds before their scheduled maturity date at a specified call price.

Question 6

Convertible bonds allow the investor to convert each bond into a specified number of shares of common stock.

Question 7

Companies that are believed to have high bankruptcy risk generally receive higher credit ratings and pay a lower interest rate for borrowing.

Question 8

The stated interest rate does not change over time.

Question 9

Unsecured bonds are not backed by a specific asset.

Question 10

As a company's level of debt increases,bankruptcy risk increases.

Question 11

We can calculate the issue price of a bond as the face amount plus the total periodic interest payments.

Question 12

Term bonds require payments in installments over a series of years.

Question 13

Interest expense incurred when borrowing money,as well as dividends paid to stockholders,are tax-deductible.

Question 14

The mixture of liabilities and stockholders' equity a business uses is called its capital structure.

Question 15

The market interest rate does not change over time.

Question 16

The lower the market interest rate,the lower the bond issue price will be.

Question 17

A private placement is when a company chooses to sell the debt securities directly to a single investor.

Question 18

Serial bonds require payment of the full principal amount of the bond at a single maturity date.

Question 19

The market interest rate represents the true interest rate used by investors to value a company's bond issue.

Question 20

Bonds issued below face amount are said to be issued at a discount.

Question 21

A lease is a contractual arrangement by which the lessor provides the lessee the right to use an asset for a specified period of time.

Question 22

The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by stockholders' equity.

Question 23

At the maturity date,the carrying value will equal the face amount of the bond.

Question 24

When bonds are issued at a premium (above face amount),the carrying value and the corresponding interest expense increase over time.

Question 25

Losses have the effect of reducing net income,while gains increase net income.

Question 26

The cash payment each period is calculated as the carrying value times the market rate.

Question 27

An amortization schedule provides a summary of the cash interest payments,interest expense,and changes in carrying value for each period.

Question 28

For bonds issued at a premium,the difference between interest expense and the cash paid increases the carrying value of the bonds.

Question 29

When an issuer retires debt of any type before its scheduled maturity date,the transaction is an early extinguishment of debt.

Question 30

The market value of bonds moves in the opposite direction of interest rates.

Question 31

A gain or loss is recorded on bonds retired at maturity.

Question 32

Operating leases are contractual agreements where the lessor owns the asset and the lessee simply uses the asset temporarily.

Question 33

Interest expense is calculated as the carrying value times the market rate.

Question 34

A premium occurs when the issue price of a bond is above its face amount.

Question 35

When bonds are issued at a discount (below face amount),the carrying value and the corresponding interest expense increase over time.

Question 36

Gains/losses on the early extinguishment of debt are reported as part of operating income in the income statement.

Question 37

Leverage enables a company to earn a higher return using debt than without debt.

Question 38

Operating leases occur when the lessee essentially buys an asset and borrows the money through a lease to pay for the asset.

Question 39

The amount reported on the balance sheet for bonds payable is equal to the carrying value at the balance sheet date.

Question 40

Monthly installment payments on a note payable include both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance.

Question 41

A bond issue with a face amount of $500,000 bears interest at the rate of 7%.The current market rate of interest is 8%.These bonds will sell at a price that is:

A)Equal to $500,000.
B)More than $500,000.
C)Less than $500,000.
D)The answer cannot be determined from the information provided.

Question 42

Bonds can be secured or unsecured.Likewise,bonds can be term or serial bonds.Which is more common?

A)Secured and term.
B)Secured and serial.
C)Unsecured and term.
D)Unsecured and serial.

Question 43

Which of the following is not true regarding callable bonds?

A)This feature allows the borrower to repay the bonds before their scheduled maturity date.
B)This feature helps protect the borrower against future decreases in interest rates.
C)Callable bonds benefit the bond investor.
D)A bond can be both callable and convertible.

Question 44

Which of the following definitions describes a serial bond?

A)Matures on a single date.
B)Secured only by the "full faith and credit" of the issuing corporation.
C)Matures in installments.
D)Supported by specific assets pledged as collateral by the issuer.

Question 45

Return on equity is calculated as net income divided by average stockholders' equity.

Question 46

The times interest earned ratio compares interest expense with income available to pay interest charges.

Question 47

Return on assets is calculated as net income divided by the ending balance for total assets.

Question 48

Serial bonds are:

A)Bonds backed by collateral.
B)Bonds that mature in installments.
C)Bonds with greater risk.
D)Bonds issued below the face amount.

Question 49

A bond issue with a face amount of $500,000 bears interest at the rate of 7%.The current market rate of interest is 6%.These bonds will sell at a price that is:

A)Equal to $500,000.
B)More than $500,000.
C)Less than $500,000.
D)The answer cannot be determined from the information provided.

Question 50

Term bonds are:

A)Bonds issued below the face amount.
B)Bonds that mature in installments.
C)Bonds that mature all at once.
D)Bonds issued below the face amount.

Question 51

The mixture of liabilities and stockholders' equity a business uses is called its:

A)Bond contract.
B)Carrying value.
C)Capital structure.
D)Accounting equation.

Question 52

A home loan with fixed monthly payments and the house as collateral most closely represents which of the following bond characteristics?

A)Secured and term.
B)Secured and serial.
C)Unsecured and term.
D)Unsecured and serial.

Question 53

The price of a bond is equal to:

A)The future value of the face amount only.
B)The present value of the interest only.
C)The present value of the face amount plus the present value of the stated interest payments.
D)The future value of the face amount plus the future value of the stated interest payments.

Question 54

Which of the following definitions describes a secured bond?

A)Matures on a single date.
B)Secured only by the "full faith and credit" of the issuing corporation.
C)Matures in installments.
D)Supported by specific assets pledged as collateral by the issuer.

Question 55

Which of the following is not a primary source of corporate debt financing?

A)Bonds Payable.
B)Common Stock.
C)Leases.
D)Notes Payable.

Question 56

Which of the following is not a true statement?

A)Companies that are believed to have high bankruptcy risk generally receive low credit ratings and must pay a higher interest rate for borrowing.
B)As a company's level of debt increases,the risk of bankruptcy increases.
C)Interest expense incurred when borrowing money,as well as dividends paid to stockholders,are both tax-deductible.
D)The mixture of liabilities and stockholders' equity a business uses is called its capital structure.

Question 57

Ordinarily,the proceeds from the sale of a bond issue will be equal to:

A)The face amount of the bond.
B)The total of the face amount plus all interest payments.
C)The present value of the face amount plus the present value of the stream of interest payments.
D)The face amount of the bond plus the present value of the stream of interest payments.

Question 58

A bond issue with a face amount of $500,000 bears interest at the rate of 10%.The current market rate of interest is also 10%.These bonds will sell at a price that is:

A)Equal to $500,000.
B)More than $500,000.
C)Less than $500,000.
D)The answer cannot be determined from the information provided.

Question 59

Convertible bonds:

A)Provide potential benefits only to the issuer.
B)Provide potential benefits only to the investor.
C)Provide potential benefits to both the issuer and the investor.
D)Provide no potential benefits.

Question 60

Which of the following definitions describes a term bond?

A)Matures on a single date.
B)Secured only by the "full faith and credit" of the issuing corporation.
C)Matures in installments.
D)Supported by specific assets pledged as collateral by the issuer.

Question 61

A $500,000 bond issue sold for $490,000.Therefore,the bonds:

A)Sold at a discount because the stated interest rate was higher than the market rate.
B)Sold for the $500,000 face amount less $10,000 of accrued interest.
C)Sold at a premium because the stated interest rate of was higher than the market rate.
D)Sold at a discount because the market interest rate was higher than the stated rate.

Question 62

The rate quoted in the bond contract used to calculate the cash payments for interest is called the:

A)Face rate.
B)Yield rate.
C)Market rate.
D)Stated rate.

Question 63

The rate quoted on the bond contract used to calculate the cash payments for interest is called the:

A)Face interest rate.
B)Interest expense rate.
C)Market interest rate.
D)Stated interest rate.

Question 64

Bond X and Bond Y are both issued by the same company.Each of the bonds has a face value of $100,000 and each matures in 10 years.Bond X pays 8% interest while Bond Y pays 9% interest.The current market rate of interest is 8%.Which of the following is correct?

A)Both bonds will sell for the same amount.
B)Bond X will sell for more than Bond Y.
C)Bond Y will sell for more than Bond X.
D)Both bonds will sell at a discount.

Question 65

For a bond issue that sells for less than the bond face amount,the stated interest rate is:

A)The actual yield rate.
B)The prime rate.
C)More than the market rate.
D)Less than the market rate.

Question 66

When bonds are issued at a premium and the effective interest method is used for amortization,at each subsequent interest payment date,the cash paid is:

A)Less than the interest expense.
B)Equal to the interest expense.
C)Greater than the interest expense.
D)More than if the bonds had been sold at a discount.

Question 67

A $500,000 bond issue sold for $510,000.Therefore,the bonds:

A)Sold at a premium because the stated interest rate was higher than the market rate.
B)Sold for the $500,000 face amount plus $10,000 of accrued interest.
C)Sold at a discount because the stated interest rate of was higher than the market rate.
D)Sold at a premium because the market interest rate was higher than the stated rate.

Question 68

Which of the following is true for bonds issued at a discount?

A)The stated interest rate is greater than the market interest rate.
B)The market interest rate is greater than the stated interest rate.
C)The stated interest rate and the market interest rate are equal.
D)The stated interest rate and the market interest rate are unrelated.

Question 69

Bonds payable should be reported as a long-term liability in the balance sheet at:

A)Face Value.
B)Current bond market price.
C)Carrying value.
D)Face value less accrued interest since the last interest payment date.

Question 70

When bonds are issued at a discount and the effective interest method is used for amortization,at each interest payment date,the interest expense:

A)Increases.
B)Decreases.
C)Remains the same.
D)Is equal to the change in book value.

Question 71

When bonds are issued at a premium,what happens to the carrying value and interest expense over the life of the bonds?

A)Carrying value and interest expense increase.
B)Carrying value and interest expense decrease.
C)Carrying value decreases and interest expense increases.
D)Carrying value increases and interest expense decreases.

Question 72

When bonds are issued at a premium and the effective interest method is used for amortization,at each interest payment date,the interest expense:

A)Increases.
B)Decreases.
C)Remains the same.
D)Is equal to the change in book value.

Question 73

For a bond issue that sells for more than the bond face amount,the stated interest rate is:

A)The actual yield rate.
B)The prime rate.
C)More than the market rate.
D)Less than the market rate.

Question 74

When bonds are issued at a discount and the effective interest method is used for amortization,at each subsequent interest payment date,the cash paid is:

A)Less than the interest expense.
B)Equal to the interest expense.
C)Greater than the interest expense.
D)More than if the bonds had been sold at a premium.

Question 75

When bonds are issued at a discount,what happens to the carrying value and interest expense over the life of the bonds?

A)Carrying value and interest expense increase.
B)Carrying value and interest expense decrease.
C)Carrying value decreases and interest expense increases.
D)Carrying value increases and interest expense decreases.

Question 76

The cash interest payment each period is calculated as the:

A)Face amount times the stated interest rate.
B)Face amount times the market interest rate.
C)Carrying value times the market interest rate.
D)Carrying value times the stated interest rate.

Question 77

Which of the following is true for bonds issued at a premium?

A)The stated interest rate is less than the market interest rate.
B)The market interest rate is less than the stated interest rate.
C)The stated interest rate and the market interest rate are equal.
D)The stated interest rate and the market interest rate are unrelated.

Question 78

Interest expense on bonds payable is calculated as the:

A)Face amount times the stated interest rate.
B)Face amount times the market interest rate.
C)Carrying value times the market interest rate.
D)Carrying value times the stated interest rate.

Question 79

Bond X and Bond Y are both issued by the same company.Each of the bonds has a face value of $100,000 and each matures in 10 years.Bond X pays 8% interest while Bond Y pays 7% interest.The current market rate of interest is 7%.Which of the following is correct?

A)Both bonds will sell for the same amount.
B)Bond X will sell for more than Bond Y.
C)Bond Y will sell for more than Bond X.
D)Both bonds will sell at a premium.

Question 80

The true interest rate used by investors to value a bond is called the:

A)Face interest rate.
B)Cash payment rate.
C)Market interest rate.
D)Stated interest rate.