Question 1

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

Accepted Answer

False

Question 2

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 can be secured or unsecured, with or without collateral.

Question 3

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

Accepted Answer

This is the definition of compound interest.

Question 4

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

Accepted Answer

Mortgage bonds are backed by the physical assets of the borrower, which serve as collateral for the loan. Therefore, they are not solely backed by the issuing company's creditworthiness.

Question 5

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

Accepted Answer

The bond indenture is the legal agreement between the corporation and the bondholders outlining the terms of the bond, including the interest rate, maturity date, and any other provisions.

Question 6

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

Accepted Answer

A bond's par value is the face amount of the bond, which is the amount the issuer promises to pay the bondholder at maturity. The market value of a bond can fluctuate based on various factors such as changes in interest rates, creditworthiness of the issuer, and supply and demand in the market. Therefore, the market value of a bond can be higher or lower than its par value.

Question 7

An annuity is a series of equal payments at equal time intervals.

Accepted Answer

An annuity is indeed a series of equal payments at equal time intervals, such as monthly or yearly payments.

Question 8

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.

Question 9

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

Accepted Answer

This is correct, payments on an installment note typically include both an interest component and a principal component.

Question 10

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 statement is correct. The carrying value of a long-term note is calculated as the present value of all future payments discounted at the market rate at the time of issuance.

Question 11

Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.

Accepted Answer

Callable bonds can be retired by the issuer before maturity at a stated dollar amount, making this statement true.

Question 12

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 where the borrower agrees to make regular payments to the lender over a set period of time. Therefore, the statement is true.

Question 13

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

Accepted Answer

This is a fundamental principle of time value of money. The reason is that money today can be invested and earn interest, whereas money in the future does not have the same earning power due to inflation and other factors. Therefore, a dollar received today is worth more than a dollar received in the future.

Question 14

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 15

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.

Accepted Answer

This is generally true for mortgages, as they often secure the loan with the property being purchased or other assets of the borrower, and the lender has the right to be paid from the proceeds of the sale if the borrower defaults on the loan.

Question 16

Owners of coupon bonds are not required to pay tax on the interest earned.

Accepted Answer

Coupon bond holders are required to pay tax on the interest earned as it is considered as income.

Question 17

Callable bonds 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 increase the bondholder's risk because the issuer has the option to redeem the bond before its maturity date, potentially at unfavorable times for the bondholder, not because of a sinking fund requirement.

Question 18

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.
$10,000 + ($10,000 x 7%) + [($10,000 + ($10,000 x 7%)) x 7%] = $11,449 or
$10,000 x 1.07 x 1.07 = $11,449

Accepted Answer

The calculation shown in the question is incorrect. The correct formula to calculate compound interest for a certain number of years is:

FV = PV x (1 + r)^n

Where FV is the future value, PV is the present value, r is the annual interest rate, and n is the number of compounding periods.

Using the given information, we have:

FV = $10,000 x (1 + 0.07)^2 = $11,449.10

Therefore, the correct answer is B.

Question 19

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

Accepted Answer

The basic present value concept is actually the opposite - that cash received today is worth more than the same amount of cash received in the future. This is due to factors such as inflation and the opportunity to invest the money and earn a return.

Question 20

The present value of an annuity can be best or easier computed as the sum of the individual future values for each payment.

Accepted Answer

The present value of an annuity is computed by discounting each future payment back to its present value and summing them up. This calculation takes into account the time value of money and the interest rate.

Quiz 14: Long-Term Liabilities