Question 1

The carrying value of a long-term note payable is computed as:

Accepted Answer

The carrying value of a long-term note payable is the present value of all the remaining payments, which are discounted using the market rate of interest at the time of issuance. This is because the carrying value represents the amount that would be needed to pay off the note immediately.

Question 2

A company borrowed cash from the bank by signing a 5-year,8% installment note.The present value of an annuity factor at 8% for 5 years is 3.9927.Each annual payment equals $75,000.The present value of the note is:

Accepted Answer

The present value of the note is calculated by multiplying the annual payment by the present value of an annuity factor: $75,000 * 3.9927 = $299,452.50.

Question 3

An advantage of bonds is:

Accepted Answer

Bonds do not grant ownership rights or control to bondholders, allowing the issuing company to retain its ownership structure and decision-making power.

Question 4

The carrying value of bonds at maturity always equals:

Accepted Answer

The carrying value of bonds at maturity is equal to their par value, which is established when the bonds are issued and does not change throughout the life of the bond. Therefore, the carrying value of bonds at maturity always equals the par value of the bond.

Question 5

A company purchased equipment and signed a 7-year installment loan at 9% annual interest.The annual payments equal $9,000.The present value of an annuity factor for 7 years at 9% is 5.0330.The present value of the loan is:

Accepted Answer

The present value of the loan is calculated by multiplying the annual payment by the present value of an annuity factor: $9,000 * 5.0330 = $45,297.

Question 6

Bonds that mature at more than one date with the result that the principal amount is repaid over a number of periods are known as:

Accepted Answer

Serial bonds are the type of bonds that mature at more than one date with the result that the principal amount is repaid over a number of periods. Each bond in the issue matures on a different date, and the principal is repaid in installments over the life of the bond issue.

Question 7

A contract pledging title to assets as security for a note or bond is known as a(an):

Accepted Answer

A mortgage is a legal contract in which a borrower pledges real property as collateral to secure a loan or bond. The lender then holds the title to the property until the debt is fully paid off. This provides security for the lender in case the borrower defaults on the loan.

Question 8

Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are known as:

Accepted Answer

Bonds with an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are called callable bonds. This gives the issuer the ability to take advantage of falling interest rates by calling in the bonds and reissuing them at a lower rate, reducing their interest expenses.

Question 9

Secured bonds:

Accepted Answer

Secured bonds have specific assets of the issuing company pledged as collateral, which means that in case of default, the bondholders have a claim on those assets. Debentures are unsecured bonds. Secured bonds are also not backed by the issuer's bank, and they are not subordinated to those of other unsecured liabilities. Sinking fund bonds require the issuer to set aside funds periodically to retire the bonds.

Question 10

A company must repay the bank a single payment of $20,000 cash in 3 years for a loan it entered into.The loan is at 8% interest compounded annually.The present value factor for 3 years at 8% is 0.7938.The present value of the loan (rounded)is:

Accepted Answer

Using the present value factor, we can calculate the present value of the loan as:

Present value = Future value x Present value factor
Present value = $20,000 x 0.7938
Present value = $15,875.60

Rounding this to the nearest dollar gives us a present value of $15,877, which is option A.

Question 11

A bond traded at 102½ means that:

Accepted Answer

When a bond is traded at 102½, it means the bond is trading at 102.5% of its par value. This is because bonds are typically issued with a par value of $1,000, so trading at 102½ would mean the bond is trading at $1,025 ($1,000 x 102.5%).

Question 12

A disadvantage of bond financing is:

Accepted Answer

The disadvantage of bond financing is that it requires the payment of periodic interest and the repayment of par value at maturity. This can create a significant burden on a company's cash flow and may restrict its ability to pursue other opportunities or investments. It also carries the risk of default if the company is unable to meet its interest or repayment obligations.

Question 13

Bonds that have interest coupons attached to their certificates,which the bondholders present to a bank or broker for collection,are called:

Accepted Answer

Coupon bonds have interest coupons attached to their certificates, which are detached and presented to a bank or broker for collection. Callable bonds can be redeemed by the issuer before their maturity date. Serial bonds have a portion of the bonds maturing at different intervals. Convertible bonds give the bondholder the option to convert the bond into a predetermined number of shares of common stock. Registered bonds have the bondholder's name and address recorded by the issuer, and the interest payments are mailed directly to the bondholder.

Question 14

Promissory notes that require the issuer to make a series of payments consisting of both interest and principal are:

Accepted Answer

Installment notes require the issuer to make a series of payments consisting of both interest and principal. Debentures are long-term bonds that are not secured by a specific asset, discounted notes are sold at a discount to their face value, indentures are legal documents outlining the terms of a bond offering, and investment notes is not a commonly used term.

Question 15

A company borrowed $40,000 cash from the bank and signed a 6-year note at 7% annual interest.The present value of an annuity factor for 6 years at 7% is 4.7665.The annual annuity payments equal:

Accepted Answer

The annual annuity payment can be calculated by dividing the loan amount by the present value of an annuity factor: $40,000 / 4.7665 = $8,391.91.

Question 16

Which of the following statements is true?

Accepted Answer

Interest on bonds is tax deductible because it is considered a business expense, reducing the taxable income of the company.

Question 17

All of the following statements regarding leases are true except:

Accepted Answer

Capital leases often transfer ownership of the asset to the lessee at the end of the lease term, whereas operating leases typically do not transfer ownership.

Question 18

A pension plan:

Accepted Answer

A pension plan is a contractual agreement where an employer provides retirement benefits to employees.

Question 19

The contract between the bond issuer and the bondholders identifying the rights and obligations of the parties,is called a(n):

Accepted Answer

A bond indenture is a legal document that outlines the terms of a bond. It includes important details such as the interest rate, payment schedule, and the rights and responsibilities of both the issuer and the bondholder. A debenture is a type of bond that is not secured by collateral, while a mortgage is a loan that is secured by property. An installment note is a form of debt that is repaid in regular payments over a period of time. A mortgage contract is a legal agreement between a lender and borrower for a mortgage loan. However, none of these options accurately describe the contract between a bond issuer and bondholders, which is specifically referred to as a bond indenture.

Question 20

Bonds owned by investors whose names and addresses are recorded by the issuing company,and for which interest payments are made with checks or cash transfers to the bondholders,are called:

Accepted Answer

Registered bonds have recorded names and addresses of bondholders and interest payments are made through checks or cash transfers directly to the bondholders. Callable bonds can be redeemed before maturity by the issuer, serial bonds mature in installments, coupon bonds have physical coupons that are clipped and redeemed for interest payments, and bearer bonds do not have recorded names and can be redeemed by whoever holds the physical bond.

Quiz 14: Long-Term Liabilities