Question 1

Callable bonds may be retired by the issuer before their specified due date.

Accepted Answer

Callable bonds give the issuer the option to retire or redeem the bonds before their specified due date.

Question 2

If an investor has the right to retire the bonds,they are referred to as callable.

Accepted Answer

False

Question 3

Debenture bonds are backed by specific collateral of the issuing company.

Accepted Answer

Debenture bonds are not backed by specific collateral of the issuing company. Instead, they are backed by the general creditworthiness and reputation of the issuing company.

Question 4

The effective interest rate method of amortization amortizes the discount or premium in a manner that produces a constant amount of interest expense from period to period.

Accepted Answer

The effective interest rate method of amortization results in a varying amount of interest expense from period to period, as it applies a constant interest rate to the carrying amount of the bond at the start of each period, which changes due to amortization.

Question 5

The issue price of a bond is always calculated at present value using the market rate of interest.

Accepted Answer

The issue price of a bond is calculated by using the present value formula, which takes into account the market rate of interest. This is the rate of return investors expect to receive on their investment, and it is used to discount the future cash flows of the bond back to their present value. As such, the market rate of interest is an essential input in determining the issue price of a bond.

Question 6

The most obvious risk to bond investors is that a company will fail and be unable to pay its debts.

Accepted Answer

This is a commonly known risk associated with investing in bonds. If a company cannot pay its debts, bondholders may receive no or only partial repayment.

Question 7

The amortization of bond discount increases the effective interest expense incurred each period for the issuer while amortization of bond premium decreases it.

Accepted Answer

This statement is true. When a bond is issued at a discount, the effective interest rate is higher than the stated bond interest rate. Amortizing the discount increases the effective interest expense each period, bringing it closer to the stated rate. On the other hand, when a bond is issued at a premium, the effective interest rate is lower than the stated rate, and amortizing the premium decreases the effective interest expense each period.

Question 8

The excess of the face value of bonds over the issue price is known as a premium.

Accepted Answer

The excess of the issue price of bonds over their face value is known as a premium. When bonds are issued at a price higher than their face value, the difference is called a premium.

Question 9

If Tanner Company becomes less creditworthy,the market price of its bonds will decline.

Accepted Answer

When a company becomes less creditworthy, the risk of default on its debt increases, which leads to a decline in the market price of its bonds.

Question 10

Discount on Bonds Payable is classified as a current liability.

Accepted Answer

Discount on Bonds Payable is classified as a long-term liability, not a current liability. It represents the difference between the face value of a bond and the amount paid for it by investors, and it is amortized over the life of the bond as interest expense.

Question 11

When a bond is issued at a discount,the interest expense each year is less than the cash payment for interest.

Accepted Answer

When a bond is issued at a discount, the interest expense each year is greater than the cash payment for interest because it includes both the cash interest payment and the amortization of the discount, which increases the total interest expense recognized each year.

Question 12

The interest rate used to calculate interest expense in the effective interest method of amortization is equal to the market rate of interest at the time the bonds are issued.

Accepted Answer

In the effective interest method of amortization, the interest rate used to calculate interest expense is the market rate of interest at the time of issuance, not the stated rate.

Question 13

Serial bonds are unique because the interest is paid as a series of daily payments.

Accepted Answer

Serial bonds are not unique because of daily interest payments. Serial bonds are bonds that mature in installments over a period of time, rather than all at once like traditional bonds. The interest payments on serial bonds are typically made in semi-annual installments, just like regular bonds.

Question 14

Convertible bonds normally sell at a higher price than nonconvertible bonds.

Accepted Answer

Convertible bonds have the added benefit of being able to be converted into stock of the issuing company, which increases their value and makes them more attractive to investors. This typically results in convertible bonds selling at a higher price than nonconvertible bonds.

Question 15

All liabilities that are not classified as current liabilities are classified as long-term.

Accepted Answer

This statement is true. Current liabilities are those that are expected to be paid or settled within one year, while long-term liabilities are those that will be paid or settled after one year. Therefore, any liability that is not classified as a current liability must be a long-term liability.

Question 16

A bond issue price is the present value of the cash flows that the bond will produce.

Accepted Answer

The price of a bond is determined by calculating the present value of the future cash flows that the bond will produce, which includes the coupon payments and the principal repayment at maturity. This is known as the bond's present value or its intrinsic value. Therefore, the given statement is true.

Question 17

The face rate is also called the nominal or stated rate.

Accepted Answer

The face rate is indeed called the nominal or stated rate of interest.

Question 18

Bonds are generally issued in denominations of $1,000.

Accepted Answer

Bonds are typically issued in denominations of $1,000. This means that each bond has a face value of $1,000, which is the amount that the issuer promises to repay to the bondholder when the bond matures. However, it is also possible for bonds to be issued in other denominations, such as $5,000 or $10,000, depending on the needs of the issuer and the preferences of investors.

Question 19

Bonds are typically issued in denominations of $10,000.

Accepted Answer

Bonds can be issued in various denominations, not just $10,000. They can also be issued in smaller or larger denominations depending on the terms of the bond.

Question 20

When the market rate of interest is less than the face rate,then the bond issue will be sold at a discount.

Accepted Answer

When the market rate of interest is less than the face rate, the bond issue will be sold at a premium because the bond's interest payments are more attractive compared to the current market rates.

Quiz 10: Long-Term Liabilities