Chapter 9 Clicker

Term bonds require payments in installments over a series of years. A. True B. False

. False

The market interest rate on bonds is lower than the stated or face rate when bonds sell A. at face value. B. below face value. C. above face value. D. at maturity value.

Above face value

One can obtain a clear picture of a company's liquidity by referring to its... A. Income Statement. B. Balance Sheet.

Balance Sheet

Banks will charge a very profitable company a higher interest rate as compared to a company with minimal income since the high‐income business will be better able to pay the extra interest cost. A. True B. False

False

If the face interest rate at the date of bond issuance exceeds the market interest rate, the bond will probably be sold at a discount. A. True B. False

False

If the market interest rate at the date of issuance of a bond exceeds the face interest rate, the present value of the face value plus the present value of all the future interest payments will equal an amount greater than the face value of the bond. A. True B. False

False

If the market interest rate at the date of issuance of a bond exceeds the face or stated interest rate, the bond will probably be sold at a premium. A. True B. False

False

The lower the debt to equity ratio, the greater the financial risk the company is taking. A. True B. False

False

The advantages of obtaining funds by issuing debt, rather than issuing additional common stock, include which of the following? A. Funds are obtained without surrendering ownership control. B. Interest expense is tax‐deductible. C. Funds are obtained without surrendering ownership control, as well as, interest expense is tax‐deductible. D. The company's default risk decreases.

Funds are obtained without surrendering ownership control, as well as, interest expense is tax‐deductible.

The amount at a present time that is equivalent to a series of payments and interest in the future. A. Present value of a single amount B. Present value of an annuity C. Future value of a single amount D. Future value of an annuity

Present value of an annuity

What measurement should be used when reporting long‐term liabilities on a balance sheet? A. Present value of the present outflow B. Present value of the future outflow C. Future value of the present outflow D. Future value of the future outflow

Present value of the future outflow

The price of a bond is equal to: A. The present value of the interest only B. The future value of the face amount only C. The future value of the face amount plus the future value of the stated interest payments D. The present value of the face amount plus the present value of the stated interest payments

The present value of the face amount plus the present value of the stated interest payments

A debt to equity ratio of 1.0 means that half of the company's assets are financed by creditors. A. True B. False

True

Cash flow generally limits the amount of debt a business can finance. A. True B. False

True

When the present value of a bond issue is calculated, both the present value of a single sum table and the present value of an annuity table must be used. A. True B. False

True

On January 1, 2018, San Bruno, Inc. issued twenty‐year bonds payable with a face value of $50,000,000 and a face interest rate of 5 percent. The bonds were issued with a market interest rate of 6 percent. Interest is payable semi‐annually on January 1 and July 1. In calculating the present value of the bond issue on January 1, 2018, A. the 5 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments B. the 6 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments. C. a 3 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments. D. the 6 percent rate will be used to calculate the present value of the face amount and a 2.5 percent rate will be used to calculate the present value of the periodic interest payments

a 3 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments.

Callable bonds A. can be redeemed by the bondholder at some time at a pre‐specified price. B. can be redeemed by the issuer at some time at a pre‐specified price. C. can be converted to stock. D. mature in a series of payments.

can be redeemed by the issuer at some time at a pre‐specified price.

The term used for bonds that are unsecured as to principal is A. series bonds. B. indenture bonds. C. debenture bonds. D.callable bonds.

debenture bonds

If bonds are issued at a premium, the face or stated interest rate is A. too low to attract investors. B. lower than the market rate of interest. C. higher than the market rate of interest. D. adjusted to a higher effective rate of interest.

higher than the market rate of interest.

Bonds usually sell at a discount when A. investors are willing to invest in the bonds at rates that are lower than the stated interest rate. B. investors are willing to invest in the bonds at rates that are higher than the stated interest rate. C. investors are willing to invest in the bonds at the stated interest rate. D. An unfavorable tax event will impact the buyer

investors are willing to invest in the bonds at rates that are higher than the stated interest rate.

When bonds are issued at a discount, the interest expense for the period is the amount of cash interest payment for the period A. less the premium amortization for the period. B. plus the premium amortization for the period. C. plus the discount amortization for the period D. less the discount amortization for the period.

plus the discount amortization for the period