Question 1

A bond's interest payments are determined by multiplying the bond's principal amount by the stated interest rate.

Accepted Answer

This is correct. The interest payments on a bond are usually paid out semi-annually and are calculated by multiplying the principal amount by the stated interest rate.

Question 2

A convertible bond can be called for early retirement at the option of the issuing company.

Accepted Answer

False

Question 3

The issuing company and the bond underwriter determine the selling price of a bond.

Accepted Answer

False

Question 4

An advantage of issuing a bond relative to stock is that the bond interest payments are tax deductible.

Accepted Answer

Bond interest payments are considered expenses for the issuer and are therefore tax deductible, whereas dividends paid on stock are not tax deductible.

Question 5

A bond will sell at a premium when the market rate of interest is greater than the stated rate of interest.

Accepted Answer

A bond will sell at a premium when the market rate of interest is lower than the stated rate of interest. When the market rate of interest is greater than the stated rate of interest, a bond will sell at a discount.

Question 6

When the market rate of interest is greater than the stated interest rate, the bond will sell at a discount.

Accepted Answer

When the market rate of interest is greater than the stated interest rate, the bond is less attractive to investors and its price will drop. This results in the bond selling at a discount, meaning its market value is lower than its face value.

Question 7

Increases in the market rate of interest subsequent to a bond issue increase the discount on the bond.

Accepted Answer

Increases in the market rate of interest subsequent to a bond issue do not affect the discount or premium of the already issued bond; they affect the price of new bonds or the market value of existing bonds. The discount or premium on a bond at issuance is fixed based on the interest rates at that time.

Question 8

Amortization of a discount on a bond payable will result in an increase in the book value of the bond liability on the balance sheet.

Accepted Answer

Amortizing a discount on a bond payable involves reducing the discount and increasing the book value of the bond liability. Therefore, it would result in an increase in the book value of the bond liability on the balance sheet.

Question 9

The payment of bond interest on the interest payment date, for bonds issued at par value, reduces both the bond liability and assets, assuming that interest expense is recorded at the time of the cash payment.

Accepted Answer

The answer of The payment of bond interest on the...

Question 10

The major disadvantages of issuing a bond are the risk of bankruptcy and the negative impact on cash flow because debt must be repaid at a specified date in the future.

Accepted Answer

The risk of bankruptcy is a major disadvantage of issuing a bond because if a company is unable to repay its debt obligations, it may be forced to declare bankruptcy. Additionally, issuing a bond requires regular interest payments and eventual repayment of the principal amount at a specified date, which can negatively impact a company's cash flow.

Question 11

The journal entry to record the interest cash payment for a bond issued at a discount results in an increase in the book value of the bond liability.

Accepted Answer

When a bond is issued at a discount, its book value (or carrying value) on the balance sheet is less than its face value (or par value). As interest payments are made, the book value of the bond liability increases towards its face value. The journal entry to record the interest cash payment for a bond issued at a discount would include a debit to Interest Expense (which increases the book value of the bond liability) and a credit to Cash.

Question 12

A bond issued at a discount will pay total cash payments for interest that are more than the total interest expense recognized over the life of the bond.

Accepted Answer

A bond issued at a discount means that it is sold for less than its face value. As a result, the total cash payments for interest will be less than the total interest expense recognized over the life of the bond. This is because the bondholder receives less cash in interest payments than what is recognized as an expense by the issuing company.

Question 13

Issuing bonds dilutes the voting power of the common shareholders because bonds have preferential voting rights.

Accepted Answer

Bonds do not have voting rights, only common shareholders have voting rights. When a company issues bonds, it is borrowing money and agreeing to pay interest to the bondholders. Bondholders do not have voting rights, so issuing bonds does not dilute the voting power of common shareholders.

Question 14

A company has a December 31 fiscal year-end. If the interest is paid annually on December 31, the bond interest expense on the income statement is the amount of the interest cash payment when the bond initially sells at par value.

Accepted Answer

The answer of A company has a December 31 fiscal...

Question 15

A bond will sell at its par value when the market rate of interest equals the stated rate of interest.

Accepted Answer

This is because the stated rate of interest is the rate at which the bond was issued and is fixed, while the market rate of interest is constantly changing. If the market rate of interest is equal to the stated rate of interest, then investors will not receive a higher or lower return than what was expected when they purchased the bond, making it sell at par value.

Question 16

The proceeds received from a bond issue will be greater than the bond maturity value when the stated interest rate exceeds the market rate of interest.

Accepted Answer

When the stated interest rate exceeds the market rate of interest, investors will be willing to pay more for the bond than its maturity value in order to secure the higher interest payments. Therefore, the proceeds received from a bond issue will be greater than the bond maturity value.

Question 17

The journal entry to record the interest cash payment for a bond issued at a premium results in an increase in the book value of the bond liability.

Accepted Answer

The payment of interest for a bond issued at a premium involves a reduction in the book value of the bond liability. This is because the bond liability was recorded at a value higher than its face value, and the interest payment represents a portion of that premium that is being paid off. Therefore, the journal entry for an interest cash payment for a bond issued at a premium would decrease the book value of the bond liability, not increase it.

Question 18

The issuance price of a bond is the present value of both the principal plus the cash interest to be received over the life of the bond discounted at the stated (coupon) rate.

Accepted Answer

The issuance price of a bond is the present value of both the principal and the cash interest to be received over the life of the bond, but it is discounted at the market (yield) rate, not the stated (coupon) rate.

Question 19

Amortization of discount on bonds payable will make the amount of interest expense reported on the income statement less than the cash paid for that year.

Accepted Answer

Amortization of discount on bonds payable increases the interest expense reported on the income statement, making it greater than the cash paid for interest.

Question 20

Either straight-line or effective-interest amortization may be used for bond premiums or discounts regardless of the amounts involved.

Accepted Answer

The answer of Either straight-line or effective-interest amortization may be...

Quiz 10: Reporting and Interpreting Bonds