Question 1

A bond issue with a face amount of $500,000 bears interest at the rate of 10%.The current market rate of interest is also 10%.These bonds will sell at a price that is:

Accepted Answer

A)  Equal to $500,000.
B)  More than $500,000.
C)  Less than $500,000.
D)  The answer cannot be determined from the information provided.E) A) and B)
F) A) and C)

Question 2

How does the amortization schedule for an installment note such as a car loan differ from an amortization schedule for bonds?

Accepted Answer

A)  The final carrying value is zero in an amortization schedule for an installment note.
B)  The final carrying value is zero in an amortization schedule for bonds.
C)  The final carrying value is zero in both amortization schedules.
D)  The final carrying value is not zero in either amortization schedule.E) C) and D)
F) A) and B)

Question 3

Convertible bonds allow the investor to convert each bond into a specified number of shares of common stock.

Accepted Answer

A) True 
 B)False

Question 4

When bonds are issued at a premium and the effective interest method is used for amortization,at each subsequent interest payment date,the cash paid is:

Accepted Answer

A)  Less than the interest expense.
B)  Equal to the interest expense.
C)  Greater than the interest expense.
D)  More than if the bonds had been sold at a discount.E) A) and D)
F) B) and C)

Question 5

A lease is a contractual arrangement by which the lessor provides the lessee the right to use an asset for a specified period of time.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following leases is just like a rental?

Accepted Answer

A)  An operating lease.
B)  A capital lease.
C)  Both an operating and a capital lease.
D)  Neither an operating lease nor a capital lease.E) A) and D)
F) B) and D)

Question 7

A premium occurs when the issue price of a bond is above its face amount.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following definitions describes a serial bond?

Accepted Answer

A)  Matures on a single date.
B)  Secured only by the "full faith and credit" of the issuing corporation.
C)  Matures in installments.
D)  Supported by specific assets pledged as collateral by the issuer.E) B) and C)
F) None of the above

Question 9

The cash payment each period is calculated as the carrying value times the market rate.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is not a primary source of corporate debt financing?

Accepted Answer

A)  Bonds Payable.
B)  Common Stock.
C)  Leases.
D)  Notes Payable.E) A) and B)
F) All of the above

Question 11

The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by stockholders' equity.

Accepted Answer

A) True 
 B)False

Question 12

A $500,000 bond issue sold for $490,000.Therefore,the bonds:

Accepted Answer

A)  Sold at a discount because the stated interest rate was higher than the market rate.
B)  Sold for the $500,000 face amount less $10,000 of accrued interest.
C)  Sold at a premium because the stated interest rate of was higher than the market rate.
D)  Sold at a discount because the market interest rate was higher than the stated rate.E) B) and C)
F) A) and C)

Question 13

The market interest rate represents the true interest rate used by investors to value a company's bond issue.

Accepted Answer

A) True 
 B)False

Question 14

Use the following information to answer the next 6 questions:
X2 issued callable bonds on January 1,2015.The bonds pay interest annually on December 31 each year.X2's accountant has projected the following amortization schedule from issuance until maturity:
 
-The X2 bonds have a life of:

Accepted Answer

A)  3 years.
B)  4 years.
C)  5 years.
D)  Cannot be determined from the given information.E) None of the above
F) A) and D)

Question 15

Which of the following is not a reason why some companies lease rather than buy?

Accepted Answer

A)  Leasing may allow you to borrow with little or no down payment.
B)  Leasing can improve the balance sheet by reducing long-term debt.
C)  Leasing can lower income taxes.
D)  Leasing transfers the title to the lessee at the beginning of the lease.E) B) and C)
F) None of the above

Question 16

Which of the following definitions describes a term bond?

Accepted Answer

A)  Matures on a single date.
B)  Secured only by the "full faith and credit" of the issuing corporation.
C)  Matures in installments.
D)  Supported by specific assets pledged as collateral by the issuer.E) A) and B)
F) A) and C)

Question 17

The market interest rate does not change over time.

Accepted Answer

A) True 
 B)False

Question 18

The true interest rate used by investors to value a bond is called the:

Accepted Answer

A)  Face interest rate.
B)  Cash payment rate.
C)  Market interest rate.
D)  Stated interest rate.E) All of the above
F) B) and C)

Question 19

Explain how each of the columns in an amortization schedule is calculated,assuming the bonds are issued at a discount.How is the amortization schedule different if bonds are issued at a premium?

Accepted Answer

Cash paid is calculated as the face amou...

Question 20

Operating leases occur when the lessee essentially buys an asset and borrows the money through a lease to pay for the asset.

Accepted Answer

A) True 
 B)False

Exam 9: Long-Term Liabilities

The true interest rate used by investors to value a bond is called the:

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The market interest rate does not change over time.

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Which of the following definitions describes a term bond?

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Which of the following is not a reason why some companies lease rather than buy?

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How does the amortization schedule for an installment note such as a car loan differ from an amortization schedule for bonds?

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A bond issue with a face amount of $500,000 bears interest at the rate of 10%.The current market rate of interest is also 10%.These bonds will sell at a price that is:

Correct AnswerverifiedShow Answer

Convertible bonds allow the investor to convert each bond into a specified number of shares of common stock.

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Operating leases occur when the lessee essentially buys an asset and borrows the money through a lease to pay for the asset.

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Which of the following definitions describes a serial bond?

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Use the following information to answer the next 6 questions: X2 issued callable bonds on January 1,2015.The bonds pay interest annually on December 31 each year.X2's accountant has projected the following amortization schedule from issuance until maturity: -The X2 bonds have a life of:

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A $500,000 bond issue sold for $490,000.Therefore,the bonds:

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The market interest rate represents the true interest rate used by investors to value a company's bond issue.

Correct AnswerverifiedShow Answer

The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by stockholders' equity.

Correct AnswerverifiedShow Answer

A lease is a contractual arrangement by which the lessor provides the lessee the right to use an asset for a specified period of time.

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When bonds are issued at a premium and the effective interest method is used for amortization,at each subsequent interest payment date,the cash paid is:

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Which of the following leases is just like a rental?

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A premium occurs when the issue price of a bond is above its face amount.

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Which of the following is not a primary source of corporate debt financing?

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Explain how each of the columns in an amortization schedule is calculated,assuming the bonds are issued at a discount.How is the amortization schedule different if bonds are issued at a premium?

Correct AnswerverifiedCash paid is calculated as the face amou...View AnswerShow Answer

The cash payment each period is calculated as the carrying value times the market rate.

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Cash paid is calculated as the face amou...
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