Question 1

Market prices of bonds have no correlation to market interest rate.

Accepted Answer

Market prices of bonds have an inverse correlation to market interest rates. As interest rates increase, bond prices decrease and vice versa. This is because investors demand a higher yield on new bonds being issued with higher interest rates, causing the price of existing bonds to decrease in order to maintain comparable yields.

Question 2

The accounting rules for investments in stock have no bearing on the percentage of ownership by the investor

Accepted Answer

The accounting rules for investments in stock, such as the equity method or consolidation, are influenced by the percentage of ownership, as they determine the level of control or influence the investor has over the investee.

Question 3

The interest rate on a bond determines the amount of interest the debtor company is expected to pay.

Accepted Answer

The interest rate on a bond is the rate at which the debtor company agrees to pay interest to the bondholder. Therefore, the interest rate does determine the amount of interest that is expected to be paid by the debtor company.

Question 4

On the balance sheet, assets are listed by dollar amount (lowest to highest).

Accepted Answer

Assets are typically listed in order of liquidity, meaning the most liquid assets (e.g. cash, marketable securities) are listed first, followed by less liquid assets (e.g. property, equipment). There is no requirement to list assets by dollar amount.

Question 5

Investments can never be classified as short-term investments.

Accepted Answer

Investments can be classified as short-term investments if they have a maturity period of less than one year.

Question 6

Bonds of publicly traded companies are traded similarly to stocks.

Accepted Answer

Bonds of publicly traded companies are bought and sold on the secondary market, just like stocks. They trade on exchanges such as the New York Stock Exchange (NYSE) and the NASDAQ, and their prices fluctuate based on supply and demand.

Question 7

Long-term investments are listed on the balance sheet after current assets and property, plant, and equipment.

Accepted Answer

The answer of Long-term investments are listed on the balance...

Question 8

On the balance sheet, Interest Receivable is reported as a fixed asset.

Accepted Answer

Interest Receivable is reported as a current asset, not a fixed asset. Fixed assets include things such as property, equipment, and buildings that are expected to have a long-term useful life and are not intended for sale in the near future. Interest Receivable represents the amount of interest earned but not yet received on a company's outstanding loans or investments, and is expected to be collected within one year, making it a current asset.

Question 9

If the market interest rate is greater than the face rate of interest on a bond, the bond will sell at a discount.

Accepted Answer

When the market interest rate is greater than the face rate of interest on a bond, the bond's price falls below its face value, resulting in the bond selling at a discount. This is because investors can get a better return on their investment by investing in bonds with higher interest rates, causing the demand for lower-interest rate bonds to decrease, resulting in a drop in their market price.

Question 10

Stocks and bonds projected to be held for longer than one year are long-term investments.

Accepted Answer

Long-term investments are typically held for longer than one year.

Question 11

Big League Corporation owns 500 shares of Small Time Company's common stock. Small Time has 100,000 shares of common stock outstanding. Big League Corporation is the:

Accepted Answer

Big League Corporation is the investor because it owns shares of Small Time Company's common stock.

Question 12

The carrying amount of bonds at maturity should be equal to the face value of the bonds.

Accepted Answer

When bonds mature, the company must repay the principal (face value) to the bondholders. Therefore, the carrying amount of bonds at maturity should be equal to the face value of the bonds.

Question 13

If bonds are issued at a premium, the carrying amount of the bonds will be greater than the face value of the bonds until it reaches the maturity date.

Accepted Answer

When bonds are issued at a premium, it means that they are sold at a price higher than their face value. This premium is amortized over the life of the bonds, which means that the carrying amount of the bonds will be greater than their face value until they reach maturity. Therefore, the given statement is true.

Question 14

Long-term investments are more liquid than property, plant, and equipment, but less liquid than current assets.

Accepted Answer

Long-term investments are generally more liquid than property, plant, and equipment because they can be sold more easily, but they are less liquid than current assets, which are expected to be converted into cash within a year.

Question 15

If $125,000 face value bonds are issued at 103, the bond is selling for $103,000.

Accepted Answer

When bonds are issued at 103, it means they are sold at 103% of their face value. Therefore, $125,000 * 103% = $128,750, not $103,000.

Question 16

Bond investments are initially recorded at cost.

Accepted Answer

Bond investments are initially recorded at cost, which is the purchase price plus any additional fees or expenses incurred to acquire the bond.

Question 17

Big League Corporation owns 500 shares of Small Time Company's common stock. Small Time has 100,000 shares of common stock outstanding. Small Time Company is the:

Accepted Answer

Big League Corporation owns less than 50% of the outstanding common stock of Small Time Company, therefore it is not a controlling or parent company. As a result, Small Time Company is the investee, and Big League Corporation is the investor.

Question 18

Assets are listed on the balance sheet from the smallest dollar amount to the largest dollar amount.

Accepted Answer

Assets are usually listed on the balance sheet in order of liquidity, not necessarily from smallest to largest dollar amount.

Question 19

Big League Corporation owns 500 shares of Small Time Company's common stock. Small Time has 100,000 shares of common stock outstanding. Big League Corporation will show the investment on their books as:

Accepted Answer

Big League Corporation's ownership of common stock in Small Time Company represents an asset on their balance sheet.

Question 20

An investment is a held-to-maturity investment if it is management's intent to sell the investment.

Accepted Answer

A held-to-maturity investment is an investment that management intends to hold until its maturity date, and not sell before that.

Quiz 8: Long-Term Investments the Time Value of Money