Question 1

Serial bonds are bonds that

Accepted Answer

Serial bonds have maturity dates that are staggered over a period of time, rather than all having the same maturity date. This allows for a more diversified payment schedule and can reduce the risk for both the borrower and the lender. A, B, and D are all true statements about bonds, but only A describes serial bonds specifically.

Question 2

Crowley Corporation purchased a building on January 2 by signing a long-term $600,000 mortgage with monthly payments of $5,500. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage at the end of the first month will be

Accepted Answer

The answer of Crowley Corporation purchased a building on January...

Question 3

A bond indenture is

Accepted Answer

A bond indenture is the legal contract between the issuer and the bondholders, which outlines the terms and conditions of the bond, including the interest rate, maturity date, and any covenants or restrictions. It is essentially the agreement that governs the relationship between the issuer and the investors who hold the bond. Therefore, option B is the correct answer. Option A describes a secured bond, while option C describes an unsecured bond, and option D refers to a bond that has defaulted on interest payments.

Question 4

An unsecured bond is the same as a

Accepted Answer

An unsecured bond is also known as a debenture bond, which is a bond that is not backed by any collateral. This means that the bondholders do not have any claim on specific assets of the issuing company in case of default.

Question 5

If bonds are issued at a premium, the face interest rate is

Accepted Answer

Bonds issued at a premium have a higher face interest rate than the market rate of interest. This is because investors are willing to pay more than the face value of the bond to receive the higher interest rate. The effective rate of interest is adjusted downward because the premium reduces the bond's yield to maturity.

Question 6

The responsibility for receiving the proper amount of interest falls on the bondholder most heavily in the case of

Accepted Answer

Coupon bonds pay interest coupons to the bondholder at regular intervals, typically semi-annually. The bondholder is responsible for collecting each interest payment by presenting the coupon to the issuer or their agent. Therefore, the responsibility for receiving the proper amount of interest falls most heavily on the bondholder in the case of coupon bonds. Term bonds and registered bonds do not have regular interest payments, and serial bonds have a predetermined schedule of payments.

Question 7

Which of the following statements is not true about trading on the equity?

Accepted Answer

Trading on the equity involves using debt to finance activities that will lead to an increase in earnings per share and thus the value of the company's stock. It is not another phrase for financial leverage (B), but rather a result of using financial leverage. It can become a disadvantage to a corporation (A) if the company takes on too much debt and is unable to make interest payments. Additionally, trading on the equity will increase the interest a corporation must pay (D) as it involves taking on debt. However, it will not increase the number of shares of stock owned (C).

Question 8

Under a defined benefit pension plan,

Accepted Answer

Under a defined benefit pension plan, the employer guarantees certain benefits to the employees upon retirement. The retirement payments are based on a formula that takes into account factors such as years of service and a predetermined benefit multiplier. Actuarial computations are necessary to determine the required contributions by the employer and the funded status of the plan. Accounting for annual pension expense can be complex as it involves estimating and recording changes in actuarial assumptions and demographic data.

Question 9

A bond with a face value of $10,000 has a current price quote of 102.62. The price in dollars and cents is

Accepted Answer

The price quote of 102.62 means the bond is priced at 102.62% of its face value. Therefore, the price in dollars is $10,000 * 102.62% = $10,262.

Question 10

Bonds Payable should be classified as a long-term liability on a balance sheet unless the issue is

Accepted Answer

The answer of Bonds Payable should be classified as a...

Question 11

Crowley Corporation purchased a building on January 2 by signing a long-term $600,000 mortgage with monthly payments of $5,500. The mortgage carries an interest rate of 10 percent. The entry to record the mortgage will include a

Accepted Answer

The entry to record the mortgage will increase the liability account Mortgage Payable by debiting it. Since the company received cash, the Cash account will also be affected, but as a credit to reduce its balance. Therefore, the correct entry is to credit Cash and debit Mortgage Payable. Option D shows this double entry correctly.

Question 12

Bonds that mature in installments are called

Accepted Answer

Bonds that mature in installments are called serial bonds. This means that a portion of the bond matures at regular intervals until the entire bond is paid off. This is in contrast to term bonds which only have one maturity date, debenture bonds which are not secured by specific assets, and zero coupon bonds which do not pay periodic interest.

Question 13

A bond with a face value of $1,000 has a current price quote of 99.00. This bond is selling for

Accepted Answer

A bond quote of 99.00 means that the bond is selling at 99% of its face value, which is $1,000 in this case. 
So, the current price of the bond would be:

$1,000 x 0.99 = $990.00

Therefore, the correct choice is C.

Question 14

A corporation issues bond certificates to

Accepted Answer

Bond certificates are issued to creditors who loan money to the corporation. These bondholders are entitled to receive periodic interest payments and the return of the principal amount upon maturity.

Question 15

Which of the following is not an advantage of issuing long-term debt?

Accepted Answer

Issuing long-term debt increases a company's financial leverage, which can increase the risk of bankruptcy if the company is unable to meet its debt obligations. Choices A, B, and D are generally considered advantages of issuing long-term debt.

Question 16

Interest coverage ratio is a measure of

Accepted Answer

The interest coverage ratio is a measure of a company's ability to meet its interest payments on outstanding debt, thus providing protection from default on interest payments.

Question 17

If the market interest rate is higher than the face interest rate at the date of issuance, bonds will

Accepted Answer

When the market interest rate is higher than the face interest rate, the bond is considered less attractive because investors can earn a higher return elsewhere. As a result, the bond will sell at a discount in order to make up for the lower interest payments.

Question 18

Debenture bonds are

Accepted Answer

Debenture bonds are not secured by specific assets, they are issued based on the creditworthiness of the corporation. This means that the bondholders rely on the general credit of the corporation to receive payment, rather than having a specific asset pledged as collateral.

Question 19

All of the following are advantages of issuing bonds rather than stock except

Accepted Answer

Payment of bond interest is required, making this statement false. Issuing bonds does provide financial leverage, allows for tax-deductible interest payments, and bondholders do not have voting rights.

Question 20

Term bonds are bonds that

Accepted Answer

Term bonds are bonds that mature in a single lump sum at a specific, predetermined maturity date. They differ from serial bonds, which have different maturity dates for different installments, and callable bonds, which may be redeemed prior to their scheduled maturity date. Specific asset-backed bonds are called secured bonds.

Quiz 13: Long Term Liabilities