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61)
On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of
$473,845. Interest is payable each June 30 and December 31. The company uses the straight-line
method to amortize the discount. The amount of discount amortized each period is $1,634.69.
A)
True
B)
False
62)
On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of
$473,845. Interest is payable each June 30 and December 31. The company uses the straight-line
method to amortize the discount. The amount of interest expense to be recorded on June 30 is
$25,000.
A)
True
B)
False
63)
A premium on bonds occurs when bonds carry a contract rate greater than the market rate at
issuance.
A)
True
B)
False
64)
A premium reduces the interest expense of a bond over its life.
A)
True
B)
False
65)
A discount reduces the interest expense of a bond over its life.
A)
True
B)
False
66)
The market value (issue price) of a bond is equal to the present value of all future cash payments
provided by the bond.
A)
True
B)
False
67)
Premium on Bonds Payable is an adjunct liability account, as it increases the carrying value of the
bond.
A)
True
B)
False
68)
When the contract rate of a bond is greater than the market rate on the date of issuance, the bond
sells at a discount.
A)
True
B)
False
69)
The issue price of bonds is found by computing the future value of the bond's cash payments,
discounted at the market rate of interest.
A)
True
B)
False
70)
The effective interest method assigns a bond interest expense amount that increases over the life of
a premium bond.
A)
True
B)
False
71)
Two common ways of retiring bonds before maturity are to (1) exercise a call option or (2)
purchase them on the open market.
A)
True
B)
False
72)
When convertible bonds are converted to a company's stock, the carrying value of the bonds is
transferred to equity accounts and no gain or loss is recorded.
A)
True
B)
False
73)
Payments on installment notes normally include accrued interest plus a portion of the principal
amount borrowed.
A)
True
B)
False
74)
The equal total payments pattern for installment notes consists of changing amounts of interest but
constant amounts of principal over the life of the note.
A)
True
B)
False
75)
Sinking fund bonds:
A)
Require equal payments of both principal and interest over the life of the bond issue.
B)
Require the issuer to set aside assets at specified amounts to retire the bonds at maturity.
C)
Decline in value over time.
D)
Are bearer bonds.
E)
Are registered bonds.
76)
Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to
maturity are known as:
A)
Sinking fund bonds.
B)
Callable bonds.
C)
Convertible bonds.
D)
Serial bonds.
E)
Junk bonds.
77)
A bond traded at 102½ means that:
A)
The market rate of interest is 2½% above the contract rate.
B)
The bonds were retired at $1,025 each.
C)
The bond traded at 102.5% of its par value.
D)
The bond pays 2.5% interest.
E)
The market rate of interest is 2.5%.
78)
Secured bonds:
A)
Are backed by the issuer's bank.
B)
Are called debentures.
C)
Are the same as sinking fund bonds.
D)
Have specific assets of the issuing company pledged as collateral.
E)
Are subordinated to those of other unsecured liabilities.
79)
Bonds that have interest coupons attached to their certificates, which the bondholders present to a
bank or broker for collection, are called:
A)
Serial bonds.
B)
Coupon bonds.
C)
Registered bonds.
D)
Callable bonds.
E)
Convertible 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)
Coupon bonds.
B)
Registered bonds.
C)
Callable bonds.
D)
Bearer bonds.
E)
Serial 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)
Installment note.
C)
Bond indenture.
D)
Mortgage contract.
E)
Mortgage.
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)
Serial bonds.
C)
Bearer bonds.
D)
Callable bonds.
E)
Sinking fund bonds.
83)
A contract pledging title to assets as security for a note or bond is known as a(an):
A)
Mortgage.
B)
Lease.
C)
Sinking fund.
D)
Indenture.
E)
Equity.
84)
Promissory notes that require the issuer to make a series of payments consisting of both interest
and principal are:
A)
Investment notes.
B)
Debentures.
C)
Indentures.
D)
Installment notes.
E)
Discounted notes.
85)
The carrying value of a long-term note payable is computed as:
A)
The present value of all remaining interest payments, discounted using the current market rate
of interest.
B)
The future value of all remaining payments, using the market rate of interest.
C)
The face value of the long-term note less the total of all future interest payments.
D)
The face value of the long-term note plus the total of all future interest payments.
E)
The present value of all remaining payments, discounted using the market rate of interest at
the time of issuance.
86)
The carrying value of bonds at maturity always equals:
A)
the amount of cash originally received in exchange for the bonds.
B) $0.
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 par value of the bond.
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 factor for 3 years at 8% is
0.7938. The present value of the loan (rounded) is:
A) $25,195. B) $51,542. C) $20,000. D) $7,761. E) $15,876.
88)
A company borrowed cash from the bank by signing a 5-year, 8% installment note. The present
value of an annuity factor at 8% for 5 years is 3.9927.The present value of a single sum at 8% for 5
years is .6806. Each annual payment equals $75,000. The present value of the note is:
A) $299,452.50.
B) $110,196.89.
C) $56,352.84.
D) $375,000.00
E) $18,784.28.
89)
A company borrowed $40,000 cash from the bank and signed a 6-year note at 7% annual interest.
The present value of an annuity factor for 6 years at 7% is 4.7665.The present value of a single
sum factor for 6 years at 7% is 0.6663. The annual annuity payments equal:
A) $8,391.90.
B) $40,000.00.
C) $60,033.02.
D) $190,660.00.
E) $26,652.00.
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 of an annuity factor for 7 years at 9% is
5.0330.The present value of a single sum factor for 7 years at 9% is 0.5470. The present value of
the loan is:
A) $4,923. B) $63,000. C) $9,000. D) $45,297. E) $16,453.
91)
A pension plan:
A)
Can be underfunded if the plan assets are more than the accumulated benefit obligation.
B)
Is the same as Other Postretirement Benefits.
C)
Is always funded fully by employers.
D)
Is a contractual agreement between an employer and its employees in which the employer
provides benefits to employees after they retire.
E)
Can be a defined benefit plan or an undefined benefit plan.
92)
All of the following statements regarding leases are true except:
A)
For a capital lease the lessee records the leased item as its own asset.
B)
For an operating lease the lessee reports the lease payments as rental expense.
C)
For a capital lease the lessee depreciates the asset acquired under the lease, but for an
operating lease the lessee does not.
D)
Capital leases create a long-term liability on the balance sheet, but operating leases do not.
E)
Capital leases do not transfer ownership of the asset under the lease, but operating leases
often do.
93)
A disadvantage of bond financing is:
A)
Bonds do not affect owners' control.
B)
Bonds can increase return on equity.
C)
Interest on bonds is tax deductible.
D)
Bonds pay periodic interest and the repayment of par value at maturity.
E)
It allows firms to trade on the equity.
94)
An advantage of bonds is:
A)
Bond payments can be burdensome when income and cash flow are low.
B)
Bonds require payment of par value at maturity.
C)
Bonds require payment of periodic interest.
D)
Bonds can decrease return on equity.
E)
Bonds do not affect owner control.
95)
Which of the following statements is true?
A)
Interest on bonds is not tax deductible.
B)
Dividends to stockholders are tax deductible.
C)
Interest on bonds is 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)
The right to receive $10,000 at maturity.
B)
Ownership rights in the issuing company.
C)
The right to receive dividends of $1,000 per year.
D)
The right to receive $10 per year until maturity.
E)
The right to receive $1,000 at maturity.
97)
Collateral agreements for a note or bond can:
A)
Increase the risk of loss in comparison with unsecured debt.
B)
Have no effect on risk.
C)
Increase total cost for the borrower.
D)
Reduce the risk of loss in comparison with unsecured debt.
E)
Reduce the issuer's assets.
98)
The party that has the right to exercise a call option on callable bonds is:
A)
The bondholder.
B)
The bond indenture.
C)
The bond trustee.
D)
The bond issuer.
E)
The bond underwriter.
99)
Which of the following accurately describes a debenture?
A)
A type of bond that can be exchanged for a fixed number of shares of the issuing
corporation's common stock.
B)
A bond with specific assets pledged as collateral.
C)
A type of bond which is not collateralized but backed only by the issuer's general credit
standing.
D)
A type of bond issued in the names and addresses of the bondholders.
E)
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.
100)
A company's total liabilities divided by its total stockholders' equity is called the:
A)
Return on total assets ratio.
B)
Equity ratio.
C)
Pledged assets to secured liabilities ratio.
D)
Times secured liabilities earned ratio.
E)
Debt-to-equity ratio.
101)
The debt-to-equity ratio:
A)
Is not relevant to secured creditors.
B)
Is calculated by dividing book value of secured liabilities by book value of pledged assets.
C)
Can always be calculated from information provided in a company's income statement.
D)
Must be calculated from the market values of assets and liabilities.
E)
Is a means of assessing the risk of a company's financing structure.
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) 1.80 B) 0.56 C) 1.25 D) 0.80 E) 0.44
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 remain unchanged.
B)
Issuing the bonds would cause the firm's debt-to-equity ratio to improve from 1.0 to 1.3.
C)
Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from .5 to .8.
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 1.0 to 1.3.
