Question 1

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

Accepted Answer

False

Question 2

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 tax deductible expenses for corporations, meaning that they can reduce the corporation's taxable income. In contrast, stock dividends are not tax deductible.

Question 3

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

Amortization of a discount on a bond payable is the process of gradually reducing the discount over the term of the bond. As the discount is reduced, the book value of the bond liability will increase to reflect the reduction in discount. Therefore, the statement is true.

Question 4

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

Accepted Answer

When the market rate of interest is greater than the coupon rate, the bond's price will decrease, causing it to sell at a discount. This is because investors will demand a higher yield to compensate for the lower fixed interest payments they will receive from the bond.

Question 5

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

Accepted Answer

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

Question 6

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

Accepted Answer

A bond issued at a discount will have a lower interest rate than the market rate, and as a result, its interest expense over the life of the bond will be lower than the total cash interest payments made over the life of the bond. Therefore, the total interest expense recognized over the life of the bond will be higher than the cash paid for interest.

Question 7

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 payment of bond interest reduces assets (cash) and increases interest expense, but it does not affect the bond liability, which remains at par value.

Question 8

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...

Question 9

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

Accepted Answer

When the market rate of interest equals the coupon rate of interest, the bond is priced at par value. If the market rate of interest is higher than the bond's coupon rate, then the bond will sell at a discount. Conversely, if the market rate of interest is lower than the bond's coupon rate, then the bond will sell at a premium.

Question 10

Amortization of discount on bonds payable will make the amount of interest expense less than the cash owed for interest for that year.

Accepted Answer

Amortization of discount on bonds payable increases the amount of interest expense reported on the income statement because it adds the amortized amount to the actual interest paid during the period.

Question 11

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

Accepted Answer

Cash payment of interest on a bond issued at a premium results in a decrease in the book value of the bond liability as the interest paid is less than the amount received for the bond.

Question 12

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

Accepted Answer

Bonds do not have voting rights, so issuing bonds does not dilute the voting power of common shareholders.

Question 13

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

Accepted Answer

When the coupon rate of a bond exceeds the market rate of interest, the bond becomes more attractive to potential buyers. This results in demand for the bond, which drives up its price above its maturity value. Therefore, the proceeds received from the bond issue will be greater than its maturity value.

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

When a bond is issued at par value, the interest expense recorded on the income statement equals the cash interest payment, as there is no premium or discount to amortize.

Question 15

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

Issuing a bond creates a legal obligation to repay the debt at a specified date in the future, which may negatively impact cash flow. Additionally, if the issuer faces financial difficulties and is unable to make payments, it may result in bankruptcy.

Question 16

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

Accepted Answer

This is correct. The coupon rate is a fixed percentage of the bond's principal amount that determines the amount of interest payments made to bondholders.

Question 17

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 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, discounted at the market rate of interest at the time of issuance, not the coupon rate.

Question 18

The journal entry for the cash payment of interest on a bond issued at a discount will result in an increase in the book value of the bond liability.

Accepted Answer

When a bond is issued at a discount, the book value of the bond liability is initially lower than the face value of the bond. As interest payments are made on the bond, the book value of the bond liability increases, approaching the face value of the bond at maturity. Therefore, a cash payment of interest on a bond issued at a discount will result in an increase in the book value of the bond liability.

Question 19

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

Accepted Answer

The answer of A convertible bond can be called for...

Question 20

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.

Quiz 10: Reporting and Interpreting Bond Securities