76) Bonds that have an option giving the issuer the right to retire them at a stated dollar amount
before maturity are known as:
A) Convertible bonds.
B) Sinking fund bonds.
C) Callable bonds.
D) Serial bonds.
E) Junk bonds.
77) A bond traded at 102½ means that:
A) The bond pays 2.5% interest.
B) The bond traded at 102.5% of its par value.
C) The market rate of interest is 2.5%.
D) The bonds were retired at $1,025 each.
E) The market rate of interest is 2½% above the contract rate.
78) Secured bonds:
A) Are called debentures.
B) Have specific assets of the issuing company pledged as collateral.
C) Are backed by the issuer’s bank.
D) Are subordinated to those of other unsecured liabilities.
E) Are the same as sinking fund bonds.
79) Bonds that have interest coupons attached to their certificates, which the bondholders present
to a bank or broker for collection, are called:
A) Coupon bonds.
B) Callable bonds.
C) Serial bonds.
D) Convertible bonds.
E) Registered bonds.
80) Bonds owned by investors whose names and addresses are recorded by the issuing company,
and for which interest payments are made with checks or cash transfers to the bondholders, are
called:
A) Callable bonds.
B) Serial bonds.
C) Registered bonds.
D) Coupon bonds.
E) Bearer bonds.
81) The contract between the bond issuer and the bondholders identifying the rights and
obligations of the parties, is called a(n):
A) Debenture.
B) Bond indenture.
C) Mortgage.
D) Installment note.
E) Mortgage contract.
82) Bonds that mature at more than one date with the result that the principal amount is repaid
over a number of periods are known as:
A) Registered bonds.
B) Bearer bonds.
C) Callable bonds.
D) Sinking fund bonds.
E) Serial bonds.
83) A contract pledging title to assets as security for a note or bond is known as a(an):
A) Sinking fund.
B) Mortgage.
C) Equity.
D) Lease.
E) Indenture.
84) Promissory notes that require the issuer to make a series of payments consisting of both
interest and principal are:
A) Debentures.
B) Discounted notes.
C) Installment notes.
D) Indentures.
E) Investment notes.
85) All of the following are true regarding long-term notes payable except:
A) The note’s carrying value at any time equals its face value minus any unamortized discount or
plus any unamortized premium.
B) Notes payable are usually issued by a single lender.
C) The market rate of interest at the time of issuance determines the periodic cash payment
amount.
D) Over the life of the note, the interest expense allocated to each period is computed by
multiplying the market rate by the beginning-of-period balance.
E) The equal total payments pattern has changing amounts of both interest and principal.
86) The carrying value of bonds at maturity always equals:
A) the amount of cash originally received in exchange for the bonds.
B) the par value of the bond.
C) the amount of discount or premium.
D) the amount of cash originally received in exchange for the bonds plus any unamortized
discount or less any premium.
E) the amount in excess of par value.
87) A company must repay the bank a single payment of $20,000 cash in 3 years for a loan it
entered into. The loan is at 8% interest compounded annually. The present value of 1 (single
sum) at 8% for 3 years is 0.7938. The present value of an annuity (series of payments) at 8% for
3 years is 2.5771. The present value of the loan (rounded) is:
A) $15,876.
B) $20,000.
C) $25,195.
D) $7,761.
E) $51,542.
88) A company borrowed cash from the bank by signing a 5-year, 8% installment note. The
present value for an annuity (series of payments) at 8% for 5 years is 3.9927. The present value
of 1 (single sum) at 8% for 5 years is .6806. Each annual payment equals $75,000. The present
value of the note is:
A) $56,352.84.
B) $18,784.28.
C) $375,000.00.
D) $299,452.50.
E) $110,196.89.
89) A company borrowed cash from the bank and signed a 6-year note at 7% annual interest. The
present value for an annuity (series of payments) at 7% for 6 years is 4.7665. The present value
of 1 (single sum) at 7% for 6 years is 0.6663. Each annual payment equals $8,400. The present
value of the note is:
A) $26,652.00.
B) $40,038.60.
C) $40,540.00.
D) $5,596.92.
E) $190,660.00.
90) A company purchased equipment and signed a 7-year installment loan at 9% annual interest.
The annual payments equal $9,000. The present value for an annuity (series of payments) at 9%
for 7 years is 5.0330. The present value of 1 (single sum) for 7 years at 9% is 0.5470. The
present value of the loan is:
A) $9,000.
B) $4,923.
C) $16,453.
D) $63,000.
E) $45,297.
91) A pension plan:
A) Is a contractual agreement between an employer and its employees in which the employer
provides benefits to employees after they retire.
B) Can be underfunded if the plan assets are more than the accumulated benefit obligation.
C) Is always funded fully by employers.
D) Can be a defined benefit plan or an undefined benefit plan.
E) Is a contract between the company and the government.
92) All of the following statements regarding leases are true except:
A) For a finance lease, the lessee records the leased item as its own asset.
B) For a finance lease, the lessee amortizes the right-of-use asset acquired under the lease.
C) Finance leases create a liability on the balance sheet.
D) Finance leases do not transfer ownership of the asset under the lease, but operating leases
often do.
E) For a short-term lease of a few days or weeks, the lessee records payments as rental expense.
93) A disadvantage of bond financing is:
A) Bonds do not affect owners’ control.
B) Interest on bonds is tax deductible.
C) Bonds can increase return on equity.
D) It allows firms to trade on the equity.
E) Bonds pay periodic interest and the repayment of par value at maturity.
94) An advantage of bonds is:
A) Bonds do not affect owner control.
B) Bonds require payment of par value at maturity.
C) Bonds can decrease return on equity.
D) Bond payments can be burdensome when income and cash flow are low.
E) Bonds require payment of periodic interest.
95) Which of the following statements is true?
A) Interest on bonds is tax deductible.
B) Interest on bonds is not tax deductible.
C) Dividends to stockholders are tax deductible.
D) Bonds do not have to be repaid.
E) Bonds always increase return on equity.
96) A bondholder that owns a $1,000, 10%, 10-year bond has:
A) Ownership rights in the issuing company.
B) The right to receive $10 semiannually until maturity.
C) The right to receive $1,000 at maturity.
D) The right to receive $10,000 at maturity.
E) The right to receive dividends of $1,000 per year.
97) Collateral agreements for a note or bond can:
A) Reduce the risk of loss in comparison with unsecured debt.
B) Increase the risk of loss in comparison with unsecured debt.
C) Have no effect on risk.
D) Reduce the issuer’s assets.
E) Increase total cost for the borrower.
98) The party that has the right to exercise a call option on callable bonds is:
A) The bondholder.
B) The bond issuer.
C) The bond indenture.
D) The bond trustee.
E) The bond underwriter.
99) Which of the following accurately describes a debenture?
A) A bond with specific assets pledged as collateral.
B) A type of bond issued in the names and addresses of the bondholders.
C) A type of bond which requires the bond issuer to create a sinking fund of assets set aside at
specified amounts and dates to repay the bonds.
D) A type of bond which is not collateralized but backed only by the issuer’s general credit
standing.
E) A type of bond that can be exchanged for a fixed number of shares of the issuing corporation’s
common stock.
100) A company’s total liabilities divided by its total stockholders’ equity is called the:
A) Equity ratio.
B) Return on total assets ratio.
C) Pledged assets to secured liabilities ratio.
D) Debt-to-equity ratio.
E) Times secured liabilities earned ratio.
101) The debt-to-equity ratio:
A) Is calculated by dividing book value of secured liabilities by book value of pledged assets.
B) Is a means of assessing the risk of a company’s financing structure.
C) Is not relevant to secured creditors.
D) Can always be calculated from information provided in a company’s income statement.
E) Must be calculated from the market values of assets and liabilities.
102) Charger Company’s most recent balance sheet reports total assets of $27,000,000, total
liabilities of $15,000,000 and total equity of $12,000,000. The debt to equity ratio for the period
is (rounded to two decimals):
A) 0.56
B) 1.80
C) 0.44
D) 0.80
E) 1.25
103) Seedly Corporation’s most recent balance sheet reports total assets of $35,000,000 and total
liabilities of $17,500,000. Management is considering issuing $5,000,000 of par value bonds (at
par) with a maturity date of ten years and a contract rate of 7%. What effect, if any, would
issuing the bonds have on the company’s debt-to-equity ratio?
A) Issuing the bonds would cause the firm’s debt-to-equity ratio to improve from 1.0 to 1.3.
B) Issuing the bonds would cause the firm’s debt-to-equity ratio to worsen from 1.0 to 1.3.
C) Issuing the bonds would cause the firm’s debt-to-equity ratio to remain unchanged.
D) Issuing the bonds would cause the firm’s debt-to-equity ratio to improve from .5 to .8.
E) Issuing the bonds would cause the firm’s debt-to-equity ratio to worsen from .5 to .8.
104) Saffron Industries most recent balance sheet reports total assets of $42,000,000, total
liabilities of $16,000,000 and stockholders’ equity of $26,000,000. Management is considering
using $3,000,000 of excess cash to prepay $3,000,000 of outstanding bonds. What effect, if any,
would prepaying the bonds have on the company’s debt-to-equity ratio?
A) Prepaying the debt would cause the firm’s debt-to-equity ratio to improve from .62 to .50.
B) Prepaying the debt would cause the firm’s debt-to-equity ratio to improve from .62 to .57.
C) Prepaying the debt would cause the firm’s debt-to-equity ratio to worsen from .62 to .50.
D) Prepaying the debt would cause the firm’s debt-to-equity ratio to worsen from .62 to .57.
E) Prepaying the debt would cause the firm’s debt-to-equity ratio to remain unchanged.
105) A bond is issued at par value when:
A) The bond pays no interest.
B) The bond is not between interest payment dates.
C) Straight line amortization is used by the company.
D) The market rate of interest is the same as the contract rate of interest.
E) The bond is callable.
106) When a bond sells at a premium:
A) The contract rate is above the market rate.
B) The contract rate is equal to the market rate.
C) The contract rate is below the market rate.
D) It means that the bond is a zero coupon bond.
E) The bond pays no interest.
107) A bond sells at a discount when the:
A) Contract rate is above the market rate.
B) Contract rate is equal to the market rate.
C) Contract rate is below the market rate.
D) Bond has a short-term life.
E) Bond pays interest only once a year.
108) Morgan Company issues 9%, 20-year bonds with a par value of $750,000 that pay interest
semiannually. The amount paid to the bondholders for each semiannual interest payment is.
A) $60,000.
B) $33,750.
C) $67,500.
D) $30,000.
E) $375,000.
109) A company issued 8%, 15-year bonds with a par value of $550,000 that pay interest
semiannually. The market rate on the date of issuance was 8%. The journal entry to record each
semiannual interest payment is:
A) Debit Bond Interest Expense $22,000; credit Cash $22,000.
B) Debit Bond Interest Expense $44,000; credit Cash $44,000.
C) Debit Bond Interest Payable $22,000; credit Cash $22,000.
D) Debit Bond Interest Expense $550,000; credit Cash $550,000.
E) No entry is needed, since no interest is paid until the bond is due.
110) On January 1, Parson Freight Company issues 7%, 10-year bonds with a par value of
$2,000,000. The bonds pay interest semiannually. The market rate of interest is 8% and the bond
selling price was $1,864,097. The bond issuance should be recorded as:
A) Debit Cash $2,000,000; credit Bonds Payable $2,000,000.
B) Debit Cash $1,864,097; credit Bonds Payable $1,864,097.
C) Debit Cash $2,000,000; credit Bonds Payable $1,864,097; credit Discount on Bonds Payable
$135,903.
D) Debit Cash $1,864,097; debit Discount on Bonds Payable $135,903; credit Bonds Payable
$2,000,000.
E) Debit Cash $1,864,097; debit Interest Expense $135,903; credit Bonds Payable $2,000,000.
111) On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7% bonds that pay
interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the market
rate of interest for similar bonds is 8%. The bond premium or discount is being amortized at a
rate of $10,087 every six months. After accruing interest at year end, the company’s December
31, Year 1 balance sheet should reflect total liabilities associated with the bond issue (including
interest) in the amount of:
A) $3,217,563.
B) $3,340,063.
C) $3,782,437.
D) $3,780,000.
E) $3,902,500.
112) On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7% bonds that pay
interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the market
rate of interest for similar bonds is 8%. The bond premium or discount is being amortized at a
rate of $10,087 every six months.
The amount of interest expense recognized by Congo Express Airways on the bond issue in Year
1 would be:
A) $132,500.
B) $225,000.
C) $265,174.
D) $245,000.
E) $224,826.
113) On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7%, bonds that pay
interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the market
rate of interest for similar bonds is 8%. The bond premium or discount is being amortized using
the straight-line method at a rate of $10,087 every six months. The life of these bonds is:
A) 15 years.
B) 30 years.
C) 26.5 years.
D) 32 years
E) 35 years.
114) Amortizing a bond discount:
A) Allocates a portion of the total discount to interest expense each interest period.
B) Increases the market value of the Bonds Payable.
C) Decreases the Bonds Payable account.
D) Decreases interest expense each period.
E) Increases cash flows from the bond.
115) The Discount on Bonds Payable account is:
A) A liability.
B) A contra liability.
C) An expense.
D) A contra expense.
E) A contra equity.
116) A discount on bonds payable:
A) Occurs when a company issues bonds with a contract rate less than the market rate.
B) Occurs when a company issues bonds with a contract rate more than the market rate.
C) Increases the Bond Payable account.
D) Decreases the total bond interest expense.
E) Is not allowed in many states to protect creditors.
117) On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and
received proceeds of $396,000. Interest is payable each June 30 and December 31. The company
uses the straight-line method to amortize the discount. The journal entry to record the first
interest payment is:
A) Debit Bond Interest Expense $14,000; credit Cash $14,000.
B) Debit Bond Interest Expense $28,000; credit Cash $28,000.
C) Debit Bond Interest Expense $14,000; debit Discount on Bonds Payable $200; credit Cash
$14,200.
D) Debit Bond Interest Expense $13,800; debit Discount on Bonds Payable $200; credit Cash
$14,000.
E) Debit Bond Interest Expense $14,200; credit Cash $14,000; credit Discount on Bonds Payable
$200.