Question 1

A corporation probably does not know who owns its coupon bonds.

Accepted Answer

Coupon bonds are bearer bonds, meaning that they are not registered in the owner's name and the corporation does not have a record of who owns them. The bondholder physically holds the bond and receives the interest payment by presenting the coupons attached to the bond to the corporation's designated payment agent.

Question 2

When the present value of a bond issue is calculated,the discount rate used should equal the face interest rate of the bonds.

Accepted Answer

The discount rate used should reflect the current market interest rates and may differ from the face interest rate of the bonds.

Question 3

If the face interest rate at the date of bond issuance exceeds the market interest rate,the bond will probably be sold at a discount.

Accepted Answer

If the face interest rate at the date of bond issuance exceeds the market interest rate, the bond will probably be sold at a premium, not at a discount.

Question 4

When the present value of a bond issue is calculated,both the present value of a single sum table and the present value of an annuity table must be used.

Accepted Answer

This is true, as the present value of a bond issue includes both a single sum payment (the face value of the bond at maturity) and a series of annuity payments (interest payments). The present value of each component must be calculated separately using the respective tables.

Question 5

The convertible feature of bonds is useful if a company wants to retire a bond issue.

Accepted Answer

The answer of The convertible feature of bonds is useful...

Question 6

Bond issue costs have the effect of increasing a premium,or reducing a discount,on bonds issued.

Accepted Answer

Bond issue costs are accounted for as an expense or amortized over the life of the bonds, and they do not affect the premium or discount on the bonds issued. They are treated separately in the financial statements.

Question 7

When all the bonds of an issue mature at the same time,they are called serial bonds.

Accepted Answer

When all the bonds of an issue mature at the same time, they are called term bonds. Serial bonds have different maturity dates, with portions of the issue maturing at different intervals over time.

Question 8

The call price of bonds is usually below face value.

Accepted Answer

The call price of bonds is usually above the face value to compensate bondholders for the early redemption of the bond.

Question 9

Once a corporation issues bonds,it need only pay interest to the bondholders over the life of the bonds,usually semi-annually,and not repay principal of the bonds at maturity.

Accepted Answer

Corporations must repay the principal amount of the bonds to bondholders at maturity, in addition to paying interest over the life of the bonds.

Question 10

If the market interest rate at the date of issuance of a bond exceeds the face interest rate,the present value of the face value plus the present value of all the future interest payments will equal an amount greater than the face value of the bond.

Accepted Answer

When the market interest rate exceeds the face interest rate, the bond is issued at a discount, meaning its present value is less than the face value.

Question 11

The carrying amount always approaches the face value over the life of the bond.

Accepted Answer

Over the life of a bond, the carrying amount (or book value) of the bond gradually approaches its face value (or par value) as any discounts or premiums are amortized.

Question 12

An $160,000 bond issue priced at 97-3/4 is sold for $156,400.

Accepted Answer

To find out, we can use the formula: Bond issue price = face value * bond price percentage expressed as a decimal.

First, convert 97-3/4 to a decimal:

97-3/4 = 97.75 
97.75% = 0.9775

Then, plug in the given information:

$156,400 = $160,000 * 0.9775 *

Solving for the bond price percentage:

0.9775 = $156,400 / ($160,000 * x) 
x = $156,400 / ($160,000 * 0.9775) = 0.975

So the bond was priced at 97.5%. Since this is less than 100%, it means it was sold at a discount. Therefore, the statement is true.

Question 13

If a bond with a face value of $1,000 and a face interest rate of 7 percent is issued for $970,the market interest rate at the date of issuance must have been greater than 7 percent.

Accepted Answer

When a bond is issued at a discount (i.e. for less than its face value), it means that the market interest rate is higher than the face interest rate. In this case, the bond was issued for $970, which is less than the face value of $1,000, indicating that the market interest rate was greater than the face interest rate of 7%.

Question 14

The market interest rate is also called the face interest rate.

Accepted Answer

The market interest rate is not the same as the face or nominal interest rate. The face or nominal interest rate is the rate that is named or written on a financial instrument, such as a bond or loan. The market interest rate, on the other hand, is the rate that is determined by supply and demand in the financial markets, and reflects the current cost of borrowing or investing.

Question 15

The par value of a bond is equal to its market value.

Accepted Answer

The par value of a bond is the amount that the bond will be worth at maturity, and it does not necessarily equate to its market value. The market value of a bond can fluctuate depending on various factors, such as changes in interest rates or creditworthiness of the issuer.

Question 16

Discounts or premiums are contra-accounts that are subtracted from or added to bonds payable on the balance sheet.

Accepted Answer

Discounts and premiums are contra-accounts that are used to adjust the face value of bonds payable on the balance sheet. A discount is subtracted from the face value, while a premium is added to the face value. This adjustment is necessary because bonds are often issued at a price that is different from their face value, and the contra-accounts reflect the difference between the issue price and the face value.

Question 17

The present value of a bond is determined by subtracting the discounted value of the payment at maturity from the discounted value of a series of fixed interest payments.

Accepted Answer

The present value of a bond is determined by adding the discounted value of the series of fixed interest payments (coupon payments) to the discounted value of the payment at maturity (the face value).

Question 18

Most bonds issued today are coupon bonds rather than registered bonds.

Accepted Answer

Most bonds issued today are registered bonds, which means the ownership is recorded, and interest payments are made directly to the registered owner. Coupon bonds, which are less common, require the holder to present physical coupons to receive interest payments.

Question 19

Bond certificates are issued to the issuing corporation by the SEC.

Accepted Answer

Bond certificates are issued by the issuing corporation to the bondholders, not to the SEC. The SEC may require filings and disclosures related to the bond issuance, but they do not issue the actual certificates.

Question 20

If a bond has a face interest rate of 6 percent,a face value of $40,000,and pays interest semi-annually,each interest payment will amount to $2,400.

Accepted Answer

The semi-annual interest payment is calculated as (6% / 2) * $40,000 = $1,200, not $2,400.

Quiz 11: Long-Term Liabilities