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20) If bonds with a face value of $209,000 are issued at 93, the amount of cash proceeds is ________.
A) $208,907
B) $209,000
C) $194,370
D) $179,740
21) If bonds with a face value of $204,000 are issued at par, the amount of cash proceeds is ________.
A) $203,890
B) $204,000
C) $224,400
D) $244,800
22) If bonds with a face value of $205,000 are issued at 110, the amount of cash proceeds is ________.
A) $225,390
B) $205,000
C) $186,364
D) $225,500
23) When a bond is issued at a price higher than the face value, the difference is known as a ________.
A) premium
B) discount
C) maturity value
D) face value
24) Present value is the amount a person would invest now to receive a greater amount in the future.
25) The future value is the bond's market price.
26) Money earns interest over time, a fact called the time value of money.
27) Future value is always less than present value.
28) Which of the following concepts represent the time value of money?
A) the concept that money becomes obsolete over time
B) the concept that money earns interest over time
C) the concept that money loses its purchasing power over time
D) the concept that money can be converted into other currencies over time
29) Regarding the time value of money, which of the following statements is incorrect?
A) The time value of money is recognition that money earns interest over time.
B) The time value of money affects bond prices.
C) Present value is always greater than future value.
D) Future value is the value of an investment at the end of a specific time frame.
30) When a bond is issued, the issue price is the present value of the interest payments the bondholder
will receive while holding the bond, plus the present value of the bond principal that will be received at
maturity.
31) The market rate is the rate used to calculate the actual cash payments made to bondholders.
32) A bond is issued at premium ________.
A) when a bond's stated interest rate is equal to the market interest rate
B) when a bond's stated interest rate is less than the effective interest rate
C) when a bond's stated interest rate is less than the market interest rate
D) when a bond's stated interest rate is higher than the market interest rate
33) The amount of cash interest the borrower pays each year is based on the ________.
A) market conditions on the day of payment
B) market interest rate
C) stated interest rate
D) effective interest rate
34) State Street Beverage Company issues $805,000 of 9%, 10-year bonds on March 31, 2017. The bonds
pay interest on March 31 and September 30. Which of the following statements is true?
A) If the market rate of interest is 10%, the bonds will issue at a premium.
B) If the market rate of interest is 10%, the bonds will issue at a discount.
C) If the market rate of interest is 10%, the bonds will issue at par.
D) If the market rate of interest is 10%, the bonds will issue above par.
35) The market rate of interest ________.
A) is also known as the stated rate of interest
B) affects the amount of cash interest the borrower pays each year
C) is printed on the bond and does not change from year to year
D) works with the stated rate of interest to set the price of a bond
36) A bond is issued at a discount when a bond's stated interest rate is ________.
A) equal to the market interest rate
B) more than the effective interest rate
C) less than the market interest rate
D) more than the market interest rate
37) The interest rate that determines the amount of cash interest the borrower pays and the investor
receives each year is called the ________.
A) amortization rate
B) market interest rate
C) stated interest rate
D) discounting rate
38) The interest rate on which cash payments to bondholders are based is the ________.
A) market rate
B) discount rate
C) stated rate
D) amortization rate
39) If a bond's stated interest rate is lower than the market rate, which of the following is true?
A) The bond will be issued at a premium.
B) The bond will be issued at par.
C) The bond will be issued at a discount.
D) The bond will be issued for an amount higher than the maturity value.
40) Which of the following statements is true if a bond's stated interest rate is higher than the market rate?
A) The bond will be issued at a premium.
B) The bond will be issued at par.
C) The bond will be issued at a discount.
D) The bond will be issued for an amount lower than the maturity value.
41) Which of the following statements is true if a bond's stated interest rate is the same as the market rate?
A) The bond will be issued at a premium.
B) The bond will be issued at par.
C) The bond will be issued at a discount.
D) The bond will be issued for an amount lower than the maturity value.
42) Which of the following statements is true if a bond is issued at an amount less than its face value?
A) The bond's stated rate is lower than the prevailing market rate at the time of sale.
B) The bond's stated rate is the same as the prevailing market rate at the time of sale.
C) The bond's stated rate is higher than the prevailing market rate at the time of sale.
D) The bond is not secured by specific assets of the issuer.
43) Which of the following statements is true if a bond is issued for an amount higher than face value?
A) The bond's stated interest rate is less than the prevailing market interest rate at time of sale.
B) The bond's stated interest rate is the same as the prevailing market interest rate at time of sale.
C) The bond's stated interest rate is more than the prevailing market interest rate at time of sale.
D) The bond is not secured by specific assets of the issuer.
44) Which of the following statements is true if a bond is issued for an amount equal to its face value?
A) The bond's stated interest rate is less than the prevailing market interest rate at time of sale.
B) The bond's stated interest rate is the same as the prevailing market interest rate at time of sale.
C) The bond's stated interest rate is more than the prevailing market interest rate at time of sale.
D) The bond is not secured by specific assets of the issuer.
45) The interest rate that investors demand to earn for loaning their money is known as the ________.
A) stated interest rate
B) coupon rate
C) differential rate
D) market interest rate
46) Complete the following table:
Bond's Stated
Interest Rate
Market
Interest Rate
Will the issue price of Bonds Payable be at
a discount, premium, or face value?
6%
8%
10%
9%
6%
6%
48) Unlike cash dividends, which are optional payments to stockholders, the interest payments on bonds
are required.
49) Debt is a less expensive source of capital than stock.
50) Bonds affect the percentage of ownership of a corporation.
51) Why would a corporation issue bonds payable instead of issuing stock?
A) Debt is a less expensive source of capital than stock.
B) Borrowing by issuing bonds payable carries no risk to the company.
C) Debt affects the percentage of ownership of the corporation by the stockholders.
D) Debt does not have to be shown on the balance sheet.
52) Earning more income on borrowed money than the related interest expense is called ________.
A) operating leverage
B) financial leverage
C) annuity
D) amortization
53) Campbell, Inc. has net income of $500,000 and 200,000 shares of common stock. The company is
considering a project that requires $800,000 and is considering two options:
• Option 1 is to borrow $800,000 at 12%.
• Option 2 is to issue 100,000 shares of common stock for $800,000.
Considering all relevant facts and figures, Campbell's management is of the opinion that the funds raised
can be used to increase income before interest and taxes by $300,000 each year. The company estimates
income tax expense to be 40%. Analyze the Campbell situation to determine which plan will result in
higher earnings per share. (Round your answers to two decimal points.)
