Question 1

When a company sells its bonds on a date other than an interest payment date, the purchasers always pay the issuer a premium.

Accepted Answer

When a company sells its bonds on a date other than an interest payment date, the purchasers may pay more or less than the face value depending on the bond's interest rate compared to the market rate, not always a premium.

Question 2

Debentures are secured debt.

Accepted Answer

Debentures are a type of unsecured debt, meaning they are not backed by any collateral.

Question 3

A bond is a written promise to pay an amount identified as the par value of the bond along with interest at a stated annual rate.

Accepted Answer

This is a correct definition of a bond.

Question 4

A bond's par value is the same as market value.

Accepted Answer

The par value of a bond represents its face value or the amount it will be worth at maturity, while the market value (or price) of a bond can fluctuate depending on various factors such as interest rates, credit ratings, and market demand. Therefore, it is not always the same as the par value.

Question 5

Both interest paid on bonds and dividends paid on shares are tax-deductible.

Accepted Answer

Dividends paid on shares are not tax-deductible. Only interest paid on bonds is tax-deductible.

Question 6

An advantage of bond financing is that interest does not have to be paid.

Accepted Answer

This statement is false. Interest must be paid on bond financing.

Question 7

Bonds with a par value of $100,000, which pay 9% annual interest and pay interest on June 30 and December 31, were sold on July 31 at par value. The issuer will receive$100,750 cash for the sale of the bond.

Accepted Answer

The bond was sold at par value, which is $100,000. However, the issuer received $100,750 in cash, which is above par value. This suggests that the bond was sold at a premium, likely due to high demand or favorable market conditions.

Question 8

Bonds must be issued on an interest payment date.

Accepted Answer

Bonds can be issued on any date set by the issuer, not necessarily on an interest payment date. Interest payment dates are predetermined schedules for paying the interest on bonds, but issuance can occur independently of these dates.

Question 9

In the event of bankruptcy, owners of secured bonds receive their share of the firm's assets as payment before the owners of other unsecured debt.

Accepted Answer

This is true. Secured bonds are backed by specific assets of the company, giving bondholders a higher priority in claims to the company's assets in the event of liquidation or bankruptcy than owners of unsecured debt.

Question 10

An advantage of bond financing is that it does not affect shareholder control.

Accepted Answer

Bond financing involves borrowing money from lenders, who become creditors of the company. Unlike equity financing, which involves selling ownership stakes to shareholders, bond financing does not give lenders any control over the company's operations. Therefore, it does not affect shareholder control.

Question 11

Bond interest rates change as the market rate of interest changes.

Accepted Answer

The answer of Bond interest rates change as the market...

Question 12

Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.

Accepted Answer

Callable bonds provide the issuer with the option to retire them at a stated dollar amount prior to maturity, making the statement true.

Question 13

A corporation can reserve the right to retire bonds early by issuing callable bonds.

Accepted Answer

Callable bonds give the issuer the right to retire the bonds before their maturity date, typically at a predetermined price.

Question 14

Interest paid on bonds is not tax-deductible.

Accepted Answer

Interest paid on bonds is typically tax-deductible for the issuer, as it is considered a business expense.

Question 15

Owners of coupon bonds are not required to pay income tax on the interest received.

Accepted Answer

Owners of coupon bonds are required to pay income tax on the interest received.

Question 16

Accrued interest is paid on bonds that are issued between interest dates.

Accepted Answer

Accrued interest represents interest that has been earned but not yet paid, and it is typically paid when bonds are issued between interest dates to compensate the bondholder for the time period between the last interest payment and the bond issuance date.

Question 17

If a bond's interest period does not coincide with the issuing corporation's accountingperiod, an adjusting entry is necessary to recognize bond interest expense accruing since the most recent interest payment.

Accepted Answer

This is because the accrual basis of accounting requires that expenses be recognized in the period they are incurred, regardless of when cash is paid. Therefore, if the bond's interest period does not align with the accounting period, an adjusting entry must be made to recognize the bond interest expense that has accrued but not yet been paid.

Question 18

Bondholders can exchange convertible bonds for a fixed number of the issuing corporation's preferred shares.

Accepted Answer

Convertible bonds are typically exchanged for a fixed number of the issuing corporation's common shares, not preferred shares.

Question 19

A bond issue with a $100,000 par value, an 8% annual contract rate, with interestpayable semiannually and a 10-year life means that the issuer must repay $100,000 at the end of 10 years plus make 20 payments of $4,000.

Accepted Answer

This is correct as the bond issue has a 10-year life, with semiannual interest payments based on an annual contract rate of 8%. This means the issuer must make 20 payments of $4,000 in addition to repaying the $100,000 par value at the end of 10 years.

Question 20

Debentures have specific assets of the issuing corporation pledged as collateral.

Accepted Answer

Debentures are a type of unsecured debt instrument that do not have specific assets of the issuing corporation pledged as collateral.

Quiz 14: Bonds and Long-Term Notes Payable