Deck 7: Debt Securities

Question 1

The market value of a debenture is the amount at which it would be exchanged in an active, liquid market (its fair value).When a company raises funds using debentures and the current market interest rate is different to the rate in the debenture deed at issue date, that company normally will receive the:

A)face amount of the debenture, pay the market rate of interest over the debenture's term and pay the market value of the debenture upon maturity
B)market value of the debenture, pay the market rate of interest over the debenture's term and pay the face amount of the debenture upon maturity
C)face amount of the debenture, pay the rate of interest in the deed over the debenture's term and pay the market value of the debenture upon maturity
D)market value of the debenture, pay the rate of interest in the deed over the debenture's term and pay the face amount of the debenture upon maturity

Answer 1

D

Question 2

Which of the following statements is incorrect?

A)A floating charge relates only to a class or classes of assets
B)A fixed charge relates to one or more specific assets such as a block of land
C)A floating charge crystallises in the event of a specified breach in the loan agreement
D)The lender who holds a floating charge has superior claim over assets compared with any other lender.

Answer 2

D

Question 3

Wor Ltd issued 100 $100 000 par amount debentures on 1 January 20X3.The annual interest rate is 10% and the premium on issue was $5000 per debenture.The interest is paid in arrears on 31 December of each year.The debentures mature on 31 December 20X7.Wor Ltd has a financial year end of 30 June.
What amount per debenture will be paid to investors when the debentures mature in 20X7?

A)$100 000
B)$105 000
C)$110 000
D)$115 000

Answer 3

C

Question 4

Which of the following statements is incorrect?
1)prepare a disclosure document before the proposed offer of debentures
2)appoint a trustee whose task is to monitor the borrower so as to safeguard the investors
3)keep a register of debenture holders

A)There is no specific format for a debenture
B)The term 'mortgage debenture' can only be used to describe a debenture that is secured by a first mortgage over real estate, where the loan does not represent more than 60% of the value of property under charge
C)The term 'debenture' can only be used to describe a debenture that is fully secured by charges over company assets
D)None of the above

Question 5

Syonara Ltd has debentures on issue which can at any time be bought back by the company.These debentures are_________________ at the option of Syonara Ltd.

A)Mortgageable
B)Convertible
C)Chargeable
D)Redeemable

Question 6

Wor Ltd issued 100 $100 000 par amount debentures on 1 January 20X3.The annual interest rate is 10% and the premium on issue was $5000 per debenture.The interest is paid in arrears on 31 December of each year.The debentures mature on 31 December 20X7.Wor Ltd has a financial year end of 30 June.
What is the term of the debentures?

A)1 year
B)4 years
C)5 years
D)6 years

Question 7

In a disclosure document:

A)the content of the document consists of a fixed checklist of information required by the Corporations Act
B)the onus for ensuring that the disclosure document has an adequate content lies with the issuer
C)all the duties of the trustee must be described because the Corporations Act does not place specific duties on the trustee
D)all of the above

Question 8

Wor Ltd issued 100 $100 000 par amount debentures on 1 January 20X3.The annual interest rate is 10% and the premium on issue was $5000 per debenture.The interest is paid in arrears on 31 December of each year.The debentures mature on 31 December 20X7.Wor Ltd has a financial year end of 30 June.
How much interest will Wor Ltd pay per debenture, over the debenture's term?

A)$50 000
B)$900 000
C)$1 000 000
D)$1 100 000

Question 9

The following obligations relating to debentures are included in the Corporations Act:
1.prepare a disclosure document before the proposed offer of debentures
2.appoint a trustee whose task is to monitor the borrower so as to safeguard the investors
3.keep a register of debenture holders
When a unregulated offer of debentures is made, a company is most likely required to:

A)1 only
B)1 and 3 only
C)3 only
D)1, 2 and 3

Question 10

Which of the following statements is incorrect? Under AASB 139:

A)debentures must initially be recorded at fair value
B)transactions costs must never be incorporated into the carrying amount of debentures
C)in the case of par issues the fair value is usually the same as the par amount
D)premium or discount on issue should not be recognised as a revenue or expense in the period in which the debenture is issued

Question 11

On Jan 1 20X1 Q Ltd had issued 500 debentures at a face amount of $5 000 each, 10% interest payable annually in arrears.There was a premium on issue of $750 per debenture.These debentures were publicly tradable after initial issue.The terms of issue state that the debentures can be bought back directly from the holder upon payment by Q Ltd of a premium of $400 per debenture and accrued interest.On July 1 20X6 Q Ltd bought back 100 of the debentures via the open market (Australian Securities Exchange) where the market price was steady at $4 300.
This buyback transaction involves which of the following amounts?

A)A premium on redemption of $40 000
B)Interest expense of $25 000
C)A discount on redemption of $70 000
D)None of these

Question 12

Which of the following are allowable methods of dealing with a discount on issue of debentures?
1)Amortise the discount by straight line over the life of the debenture as an annual period expense to profit and loss
2)Amortise the discount by reducing balance over the life of the debenture as an annual period expense to profit and loss
3)Recognise the whole discount immediately as a period expense
4)Amortise the discount by adjusting (increasing) interest expense over the life of the debenture

A)1, 2 and 3
B)1, 2 and 4
C)1, 2, 3 and 4
D)4 only

Question 13

Which of the following statements is incorrect?

A)Debt instrument is a generic name for the document or contract that sets out details of the debt
B)Debt securities are a form of financial instrument
C)'Redemption' means repayment of a debt
D)Redeemed debentures can not be reissued

Question 14

Wor Ltd issued 100 $100 000 par amount debentures on 1 January 20X3.The annual interest rate is 10% and the premium on issue was $5000 per debenture.The interest is paid in arrears on 31 December of each year.The debentures mature on 31 December 20X7.Wor Ltd has a financial year end of 30 June.
Deb Ltd has 100 $1000 face amount 10 year debentures on issue.They were issued on 1 July 20X0 at par with an annual interest rate of 5%.The interest is paid in arrears on 30 June of each year.The terms of the debenture provide that the company can buy back the debentures provided that it pays a penalty of $50 per debenture.If on 30 June 20X3 the company bought back half of these debentures, what is the total expense relating to this debenture issue would be included in the income statement for that financial year?

A)$750
B)$2500
C)$5000
D)$7500

Question 15

On Jan 1 20X1 Q Ltd had issued 500 debentures at a face amount of $5 000 each, 10% interest payable annually in arrears.There was a premium on issue of $750 per debenture.These debentures were publicly tradable after initial issue.The terms of issue state that the debentures can be bought back directly from the holder upon payment by Q Ltd of a premium of $400 per debenture and accrued interest.On July 1 20X6 Q Ltd bought back 100 of the debentures via the open market (Australian Securities Exchange) where the market price was steady at $4 300.
What would be the total cash outflow incurred during this buyback by Q Ltd?

A)$430 000
B)$495 000
C)$565 000
D)None of these numbers

Question 16

Which of the following statements is incorrect?

A)Generically a 'debenture' is simply an acknowledgement of debt
B)The Corporations Act deems some documents not to be debentures, such as cheques and bills of exchange
C)The Corporations Act requires borrowers not to use the term 'debenture' unless the debt is secured by a charge over assets
D)Unsecured debts are not debentures for the purposes of complying with regulatory sections of the Corporations Act

Question 17

The following obligations relating to debentures are included in the Corporations Act:
1.prepare a disclosure document before the proposed offer of debentures
2.appoint a trustee whose task is to monitor the borrower so as to safeguard the investors
3.keep a register of debenture holders
When a regulated offer of debentures is made, and all of the offer is purchased by an investment bank, a company is always required to:

A)1 only
B)1 and 3 only
C)3 only
D)1, 2 and 3.

Question 18

Wor Ltd issued 100 $100 000 par amount debentures on 1 January 20X3.The annual interest rate is 10% and the premium on issue was $5000 per debenture.The interest is paid in arrears on 31 December of each year.The debentures mature on 31 December 20X7.Wor Ltd has a financial year end of 30 June.
How much cash will be received by Wor Ltd in relation to this debenture issue?

A)$10 500 000
B)$10 000 000
C)$500 000
D)$100 000

Question 19

On Jan 1 20X1 Q Ltd had issued 500 debentures at a face amount of $5 000 each, 10% interest payable annually in arrears.There was a premium on issue of $750 per debenture.These debentures were publicly tradable after initial issue.The terms of issue state that the debentures can be bought back directly from the holder upon payment by Q Ltd of a premium of $400 per debenture and accrued interest.On July 1 20X6 Q Ltd bought back 100 of the debentures via the open market (Australian Securities Exchange) where the market price was steady at $4 300.

-What would be the correct journal entry to record this buy back by Q Ltd?
$ $

A) $\begin{array}{llcc} \text { } &\$&\$ \\ \text {Dr Debentures } &500000\\ \text {\( \mathrm{Cr} \) Revenue - discount on redemption of debentures } &&70000\\ \text { Cr Bank} &&430000\\ \text { } &\\ \text { } &\\\end{array}$

B) $\begin{array} { l r r } \text { Dr Debentures } & 430000 & \\\text { Dr expense - premium on redemption of debentures } & 40000 & \\\text { Dr interest expense } & 25000 & \\\text { Cr Bank } & & 495000\end{array}$
C) $\begin{array} { l r r } \text { Dr Debentures } &500000& \\\text { Dr expense - premium on redemption of debentures } & 40000 & \\\text { Dr interest expense } & 25000 & \\\text { Cr Bank } & & 565000\end{array}$

D)None of these entries

Question 20

Which of the following are allowable methods of dealing with a premium on issue of debentures?
1)Amortise the premium by straight line over the life of the debenture as an annual period revenue to profit and loss
2)Amortise the premium by reducing balance over the life of the debenture as an annual period revenue to profit and loss
3)Recognise the whole premium immediately as a period revenue
4)Amortise the premium by adjusting (reducing) interest expense over the life of the debenture

A)1 and 2
B)1, 2 and 4
C)1, 2, 3 and 4
D)4 only

Question 21

A company must prepare a disclosure document before every issue of debentures.

Question 22

A convertible note enables the holder to convert the debt into paid-up shares.

Question 23

'Par' amounts of debt are officially abolished along with par amounts for shares.

Question 24

Trust accounts must always be used in the issue of new debt.

Question 25

Redemption of debentures at a discount, rather than a premium is possible condition of a debt agreement.