Question 1

Mortgage contracts grant the lender the right to be paid from the cash proceeds of the sale of a borrower's assets identified in the mortgage if the borrower fails to make the required payments.

Accepted Answer

This is typically known as a "power of sale" clause in a mortgage contract.

Question 2

The legal contract between the issuing corporation and the bondholders is called the bond indenture.

Accepted Answer

The bond indenture is a legal document that outlines the terms and conditions of the bond issue and is the contract between the issuing corporation and the bondholders.

Question 3

A disadvantage of bond financing over equity financing is the burden on the cash flows of the company.

Accepted Answer

Bond financing requires regular interest payments, which can be a burden on the cash flows of the company, whereas equity financing does not require any regular payments.

Question 4

An installment note is an obligation of the issuing company that requires a series of periodic payments to the lender.

Accepted Answer

An installment note is a type of loan that requires the borrower to make regular payments (usually monthly) until the total amount owed is repaid. Therefore, it is an obligation of the issuing company to make these periodic payments to the lender.

Question 5

Payments on an installment note normally include the accrued interest expense plus a portion of the amount borrowed.

Accepted Answer

This is the typical structure for installment notes where the borrower pays back a portion of the principal balance along with the interest accrued over each installment period.

Question 6

Issuers of coupon bonds are not allowed to deduct the interest expense on their tax returns.

Accepted Answer

The answer of Issuers of coupon bonds are not allowed...

Question 7

Mortgage bonds are backed only by the good faith and credit of the issuing company.

Accepted Answer

Mortgage bonds are backed by the underlying mortgage loans, which serve as collateral for the bond. The issuing company is responsible for administering the mortgage loans and collecting payments from borrowers, but the bondholders have a claim on the underlying assets in the event of default.

Question 8

A basic present value concept is that cash paid or received in the future has more value now than the same amount of cash received today.

Accepted Answer

The answer of A basic present value concept is that...

Question 9

A bond's par value is not necessarily the same as its market value.

Accepted Answer

The par value of a bond is the face value or the amount of money that the bond will be worth when it matures. However, the market value of a bond can fluctuate based on various factors such as interest rates, credit ratings, and supply and demand in the market. Therefore, the par value and market value of a bond can differ.

Question 10

Callable bonds can be exchanged for a fixed number of shares of the issuing corporation's common stock.

Accepted Answer

The answer of Callable bonds can be exchanged for a...

Question 11

A company invests $10,000 at 7% compounded annually. At the end of the second year, the company should have $11,400 in the fund.

Accepted Answer

The correct calculation for compound interest over 2 years at 7% annually on a $10,000 investment would be $10,000 * (1 + 0.07)^2 = $10,000 * 1.1449 = $11,449, not $11,400.

Question 12

A basic present value concept is that cash paid or received in the future has less value now than the same amount of cash today.

Accepted Answer

This is due to factors such as inflation and the opportunity cost of not having the cash to invest or spend today.

Question 13

One of the similarities of bond and equity financing is that both dividends and equity distribution payments are tax deductible.

Accepted Answer

Dividends and equity distribution payments are not tax deductible, only interest payments on bonds are tax deductible.

Question 14

Term bonds are scheduled for maturity on one specified date, whereas serial bonds mature at more than one date.

Accepted Answer

Term bonds have a single maturity date, while serial bonds have multiple maturity dates spread out over time.

Question 15

Compounded means that interest during a second period is based on the total amount borrowed plus the interest accrued in the first period.

Accepted Answer

Compounding involves adding the interest earned during one period to the principal borrowed, and then calculating interest based on the new total for the next period. This process continues for each period, resulting in interest earned on both the original principal and previously earned interest.

Question 16

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 them at a stated dollar amount prior to maturity, making the statement true.

Question 17

Debentures always have specific assets of the issuing company pledged as collateral.

Accepted Answer

Debentures do not always have specific assets pledged as collateral. They may be unsecured or have a general charge on the assets of the issuing company.

Question 18

The carrying value of a long-term note is computed as the present value of all remaining future payments, discounted using the market rate at the time of issuance.

Accepted Answer

This is the correct definition of carrying value for a long-term note.

Question 19

A particular feature of callable bonds is that they reduce the bondholder's risk by requiring the issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds at maturity.

Accepted Answer

Callable bonds do not necessarily require the issuer to create a sinking fund to repay the bonds at maturity. In fact, callable bonds give the issuer the option to call (redeem) the bonds before maturity, which actually increases the bondholder's risk of not receiving the full interest payments and principal amount if the bonds are called.

Question 20

Bonds and long-term notes are similar in that they are typically transacted with multiple lenders.

Accepted Answer

The answer of Bonds and long-term notes are similar in...

Quiz 10: Accounting for Long-Term Liabilities