SB Chapter 10 Review

Bonds are securities that can be readily bought and sold. A bond issue consists of a number of bonds, usually in denominations of Blank______ or Blank______ and is sold to many different lenders. $100; $1,000 $1,000; $5,000 $1,000; $10,000 $500; $5,000

$1000; $5000

Bond market values are expressed as a percentage of their par (face) value. For example, a company's bonds might be trading at 103, which means that they can be bought or sold for Blank______ of their par value.

103% is correct ; If a bond is trading at 103, it means the bond is being bought or sold for 103% of its par value. For example, if the bond's face value is $1,000, it would be bought or sold for $1,030 (which is 103% of $1,000).

Which of the following statements are advantages of bond financing?

Bonds do not affect owner control. Bonds can increase return on equity. Interest on bonds is tax deductible.

Which of the following is a disadvantage of bond financing?

Bonds require payment of periodic interest and the par value; can descrese return on equity

Which of the following formulas is used to compute the times interest earned?

Income before interest expense and income tax/interest expense

Most bonds require par value to be repaid __ and interest to be paid __.

at the maturity date; semiannually

A bond Blank______ may be issued as evidence of the company's debt.

certificate

When a company guarantees the payment of debt owed by a supplier, customer or another company, the guarantor usually discloses the guarantee as a (known/contingent)____liability

contingent liability

The Blank______ rate is the interest rate specified, sometimes referred to as the coupon rate, stated rate, or nominal rate.

contract

Which of the following situations is not a contingent liability? Multiple choice question. Debt guarantee of owner Possible legal claim against a company Future natural disaster Probable legal claim against a company

future natural disaster

The legal contract between the bondholders and the issuer is called the bond (issuance/indenture/certificate)

indenture

The rate that borrowers are willing to pay and lenders are willing to accept for a particular bond at its risk level is called the bond's_______

market rate

A potential legal claim is recorded Multiple choice question. only if payment for damages is reasonably possible and the amount is reasonable. only if payment for damages is probable and the amount can be reasonably estimated. only if the claim cannot be reasonably estimated but is reasonably possible. only if the claim can be reasonably estimated.

only if payment for damages is probable and the amount can be reasonably estimated.

The Blank______ value of a bond, also called the face amount or face value, is paid at a stated future date, known as the bond's maturity date.

par

A contingent liability can be ignored (not recorded in the financial statements or notes to the financial statements) if it is considered as (probable/reasonably possible/remote) possibility.

remote

The ratio of income before interest expense (and any income taxes) divided by interest expense reflects the risk of a company not being able to pay fixed expenses if sales decline is called the Blank______ ratio. Multiple choice question. times interest earned interest payment interest turnover

times interest earned

debt to equity ratio

total liabilities or debt/ total equity

Most bonds require (interest/par) ______ value to be repaid at maturity and (interest/par) ________ , to be paid semiannually.

Par > is paid at maturity date; Interest is paid semiannually