Question 1

Interest expense on bonds payable is calculated as the:

Accepted Answer

The answer of Interest expense on bonds payable is calculated...

Question 2

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

Accepted Answer

The proceeds from the sale of a bond issue represent the actual amount of money received by the issuer of the bond after all the expenses associated with the issuance of the bond have been deducted. The face amount of the bond, which is the principal amount that will be repaid at maturity, is not necessarily equal to the proceeds from the sale of the bond issue.

The best answer is C because it represents the present value of both the face amount and the stream of interest payments. This is because the market value of a bond is equal to the present value of its future cash flows, which includes both the face amount and the interest payments. Therefore, the proceeds from the sale of a bond issue will equal the present value of the face amount plus the present value of the stream of interest payments.

Question 3

Given the information below,which bond(s)will be issued at a discount?
$$\begin{array} { | l | c | c | c | c | } 
\hline & \text { Bond 1 } & \text { Bond 2 } & \text { Bond 3 } & \text { Bond 4 } \
\hline \text { Stated Rate of Return } & 10 \% & 8 \% & 12 \% & 12 \% \
\hline \text { Market Rate of Return } & 12 \% & 8 \% & 15 \% & 10 \% \
\hline
\end{array}$$

Accepted Answer

The answer of Given the information below,which bond(s)will be issued...

Question 4

Given the information below,which bond(s)will be issued at a premium?
$$\begin{array} { | l | c | c | c | c | } 
\hline & \text { Bond 1 } & \text { Bond 2 } & \text { Bond 3 } & \text { Bond 4 } \
\hline \text { Stated Rate of Return } & 7 \% & 12 \% & 10 \% & 8 \% \
\hline \text { Market Rate of Return } & 8 \% & 10 \% & 10 \% & 9 \% \
\hline
\end{array}$$

Accepted Answer

A bond is issued at a premium when its stated rate of return is higher than the market rate of return. Bond 2 has a stated rate of 12% and a market rate of 10%, so it will be issued at a premium.

Question 5

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

Accepted Answer

When bonds sell for less than their face value, it is considered to be selling at a discount. The most common reason for bonds selling at a discount is when the market interest rate is higher than the stated rate on the bond. This makes the bond less attractive to buyers, as they can get a better return on their investment elsewhere. In this case, the bond issue sold for $490,000, which is less than the face value of $500,000, indicating that the bond sold at a discount due to the market interest rate being higher than the stated rate.

Question 6

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?

Accepted Answer

When the market interest rate is higher than the coupon rate, the bond will sell at a discount. Since Bond Y has a higher coupon rate than Bond X, it will be more attractive to investors, and therefore it will sell for more than Bond X. Therefore, Bond Y will sell for more than Bond X.

Question 7

Raiders Company issues a bond with a stated interest rate of 10%,face value of $50,000,and due in 5 years.Interest payments are made semi-annually.The market rate for this type of bond is 12%.What is the issue price of the bond?

Accepted Answer

The issue price of the bond is calculated by discounting the future cash flows (interest payments and face value) at the market rate of 12%. Since interest is paid semi-annually, the market rate per period is 6%, and there are 10 periods. The bond's price is the present value of the annuity (interest payments) plus the present value of the lump sum (face value).

Question 8

Given the information below,which bond(s)will be issued at a premium?
$\begin{array}{|l|c|c|c|c|}
\hline & \text { Bond 1 } & \text { Bond 2 } & \text { Bond 3 } & \text { Bond 4 } \
\hline \text { Stated Rate of Return } & 5 \% & 10 \% & 7 \% & 10 \% \
\hline \text { Market Rate of Return } & 7 \% & 8 \% & 7 \% & 9 \% \
\hline
\end{array}$

Accepted Answer

Bonds 2 and 4 will be issued at a premium because their market rate of return is lower than their stated rate of return.

Question 9

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

Accepted Answer

The fact that the bonds sold for more than their original issue price means that they sold at a premium. This suggests that the stated interest rate was higher than the market rate, making them more attractive to investors.

Question 10

The cash interest payment each period is calculated as the:

Accepted Answer

The cash interest payment each period is calculated as the face amount of the bond times the stated interest rate, which is the rate specified in the bond contract.

Question 11

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

Accepted Answer

When a bond sells for more than its face amount, it is sold at a premium, indicating that the stated interest rate is more than the market rate.

Question 12

Given the information below,which bond(s)will be issued at a discount?
$$\begin{array} { | l | c | c | c | c | } 
\hline & \text { Bond 1 } & \underline { \text { Bond 2 } } & \underline { \text { Bond 3 } } & \underline { \text { Bond 4 } } \
\hline \text { Stated Rate of Return } & 5 \% & 7 \% & 12 \% & 10 \% \
\hline \text { Market Rate of Return } & 7 \% & 8 \% & 12 \% & 9 \% \
\hline
\end{array}$$

Accepted Answer

The answer of Given the information below,which bond(s)will be issued...

Question 13

Bonds usually sell at their:

Accepted Answer

Bonds usually sell at their present value, which is the current market value of the bond.

Question 14

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

Accepted Answer

Bonds issued at a discount have a stated interest rate that is lower than the market interest rate. This is because investors are willing to pay less for the bond upfront due to the lower interest payments over the life of the bond. Therefore, the market interest rate is greater than the stated interest rate.

Question 15

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

Accepted Answer

If a bond is selling for less than its face amount, it is said to be trading at a discount. The stated interest rate remains the same, but the market rate (or yield rate) demanded by investors will be higher than the stated interest rate, which makes the bond less valuable in the market. Therefore, the stated rate is less than the market rate.

Question 16

Raiders Company issues a bond with a stated interest rate of 10%,face value of $50,000,and due in 5 years.Interest payments are made semi-annually.The market rate for this type of bond is 8%.What is the issue price of the bond?

Accepted Answer

To calculate the issue price of the bond, we need to use the present value formula with the given information.

PV = (C x [1 - (1 + r)^-n] / r) + (FV / (1 + r)^n)

Where:
PV = Present value
C = Periodic interest payment
r = Discount rate/market rate
n = Number of periods
FV = Face value

Plugging in the given values, we get:

PV = ($2,500 x [1 - (1 + 0.08/2)^-10] / (0.08/2)) + ($50,000 / (1 + 0.08/2)^10)
PV = $54,055

Therefore, the issue price of the bond is $54,055, which is closest to option C.

Question 17

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

Accepted Answer

Bonds issued at a premium have a stated interest rate that is higher than the market interest rate. This means that investors are willing to pay more than the face value of the bond in order to receive the higher interest payments. As a result, the effective interest rate that investors receive is lower than the stated interest rate, which is why the market interest rate is less than the stated interest rate.

Question 18

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

Accepted Answer

The rate quoted in the bond contract that is used to calculate the cash payments for interest is called the stated rate. It is also sometimes referred to as the coupon rate. The face rate refers to the rate at which the bond will be repaid at maturity, while the market rate is the current rate of return required by investors for similar investments. The yield rate is a calculation that takes into account the bond's price, face value, and stated interest rate to determine the effective rate of return.

Question 19

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?

Accepted Answer

Bond X pays a higher interest rate than the current market rate, so it will be in higher demand and sell at a premium. Bond Y pays a lower interest rate than the market rate, so it will sell at a discount. Therefore, Bond X will sell for more than Bond Y.

Question 20

The rate of interest expense incurred on a bond payable for bonds of similar risk is called the:

Accepted Answer

The market rate represents the rate of interest that investors demand on bonds of similar risk. This rate determines the interest expense that the issuer will incur on its bond payable. It is also known as the effective interest rate, and it is used to calculate the present value of the bond's future cash flows. The face rate is the rate of interest that is printed on the face of the bond and is used to determine the bond's cash interest payments. The yield rate is the rate of return that an investor earns on a bond, and it may differ from the market rate due to changes in the bond's price. The stated rate is another name for the face rate and is used to disclose the bond's contractual interest rate.

Quiz 9: Long-Term Liabilities