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Indicate whether the statement is true or false.
1. Bonds generally have shorter terms and are for larger amounts than notes payable.
a.
True
b.
False
2. Interest expense is a financing expense that is listed in the chart of accounts as an operating expense.
a.
True
b.
False
3. Loan interest rates are often based on bond interest rates.
a.
True
b.
False
4. A corporation usually sells its bonds to a securities dealer who sells the bonds to individual investors.
a.
True
b.
False
5. Accounts payable and short-term notes payable are examples of collateral.
a.
True
b.
False
6. A business would typically benefit from signing a note for an extension of time on an account payable rather than
drawing from a line of credit.
a.
True
b.
False
7. Submitting a business plan with a loan application serves to convince the bank that the business can repay the loan.
a.
True
b.
False
8. A line of credit does not have to be repaid as long as the business pays its monthly interest.
a.
True
b.
False
9. A business should only raise capital if the projected increase in earnings exceeds the prime interest rate.
a.
True
b.
False
10. An advantage of selling stock is that the additional capital does not have to be returned to the stockholders as long as
the business continues operations.
a.
True
b.
False
11. Unlike a line of credit, the interest rate on a promissory note is fixed for the term of the note.
a.
True
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b.
False
12. Preferred stock dividends are determined by the par value and the prime interest rate.
a.
True
b.
False
13. The creditor can take and sell collateral if a borrower is unable to repay the loan.
a.
True
b.
False
14. A portion of monthly payments on a note payable reduces the outstanding loan principal.
a.
True
b.
False
15. A business that pays a dividend reduces its internal source of capital.
a.
True
b.
False
16. The face value of a bond is the amount to be repaid at the end of the bond term.
a.
True
b.
False
17. A business can draw any amount from a line of credit within the terms of the loan agreement.
a.
True
b.
False
18. Creditors may be unwilling to lend money to a business with a high debt ratio.
a.
True
b.
False
19. Corporations are required to pay dividends to preferred stockholders.
a.
True
b.
False
20. Unpaid dividends on preferred stock may have to be paid before common stockholders receive any dividends.
a.
True
b.
False
21. The spreading of the control over the business through the issuance of new stock is known as dilution of control.
a.
True
b.
False
22. A bondholder who purchases a bond on December 1 would receive one-sixth of the December 31 interest payment.
a.
True
b.
False
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Directions: Select the one term that best fits each definition. Print the letter identifying your choice on the line to the left
of the statement.
a.
bond
b.
bond issue
c.
capital expenditure
d.
collateral
e.
cost of capital
f.
debt financing
g.
equity financing
h.
financial leverage
i.
interest expense
j.
issue date
k.
line of credit
l.
non-operating expenses
m.
par value
n.
preferred stock
o.
prime interest rate
p.
revenue expenditure
q.
stated interest rate
23. The interest rate charged to a bank’s most creditworthy customers.
24. A long-term promise to pay a specified amount on a specified date and to pay interest at stated intervals.
25. Obtaining capital by issuing additional stock in a corporation.
26. The ability of a business to use borrowed funds to increase its earnings.
27. Assets pledged to a creditor to guarantee repayment of a loan.
28. The ratio of interest and dividend payments to the proceeds from debt and capital financing.
29. The payment of an operating expense necessary to earn revenue.
30. The date on which a business issues a note, bond, or stock.
31. Expenses that are not related to a business’s normal operations.
32. Obtaining capital by borrowing money for a period of time.
33. A bank loan agreement that provides immediate short-term access to cash.
34. A value assigned to a share of stock.
35. Interest incurred on borrowed funds.
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36. The interest rate used to calculate periodic interest payments on a bond.
37. Purchases of plant assets used in the operation of a business.
38. A class of stock that gives preferred shareholders preference over common shareholders in dividends along with other
rights.
39. All bonds representing the total amount of a loan.
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