Question 1

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 statement is true.

Question 2

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

Accepted Answer

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

Question 3

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

Accepted Answer

Callable bonds give the issuer the option to retire the bonds before maturity. The specified dollar amount is known as the call price.

Question 4

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

Secured bondholders have a higher priority for receiving payment in the event of bankruptcy as they have a claim on specific assets of the firm. Unsecured bondholders have a lower priority and may not receive full payment.

Question 5

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

Accepted Answer

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

Question 6

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 7

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

Accepted Answer

A bond's market value can be higher or lower than its par value, depending on various factors such as interest rates, credit rating, and current market conditions.

Question 8

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

Accepted Answer

This is true because the issuing corporation must recognize the interest expense that has accrued between the last interest payment and the end of the accounting period, even if the interest payment period does not align with the accounting period. This is done through an adjusting entry.

Question 9

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 10

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 bonds in the form of coupon payments.

Question 11

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.

Question 12

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 13

A bond issue with a $100,000 par value,an 8% annual contract rate,with interest payable 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

The bond issue has a $100,000 par value, which means the issuer must repay $100,000 at the end of 10 years. The contract rate is 8%, which means the issuer must make semiannual interest payments of $4,000 (8% of $100,000 divided by 2). Over the 10-year life of the bond, there will be 20 such payments of $4,000.

Question 14

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

Accepted Answer

Bond financing does not involve issuing new shares, so it does not dilute existing shareholder ownership or control. However, bondholders may have certain legal rights and claims on a company's assets that could impact shareholder control in certain circumstances.

Question 15

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 16

Debentures are secured debt.

Accepted Answer

Debentures are unsecured debt, meaning they are not backed by any specific asset or collateral.

Question 17

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 18

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

Accepted Answer

Callable bonds give the corporation the right to retire bonds early by paying the investors a predetermined call price. This allows the corporation to take advantage of lower interest rates or to restructure its debt.

Question 19

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. The interest income from coupon bonds is subject to federal, state, and local income taxes.

Question 20

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

Accepted Answer

Accrued interest is the interest that has accumulated on a bond since the last interest payment date. Therefore, if a bond is issued between interest dates, the buyer will have to pay the accrued interest to the seller in addition to the market price of the bond.

Quiz 15: Bonds and Long-Term Notes Payable