Accounting 209 Exam 3
characteristics of bonds are
-Payment of interest to bondholders is required -interest expense is deductible for income tax purposes - bondholders have priority over common stockholders in the liquidation of assets
Which of the following is correct
-The market rate of interest refers to the interest that the bond-issuing company must pay to be competitive with other investments - there are almost always small differences between the coupon rate and the market rate when bonds are issued
What is ordinary anuity
1. equal payments 2. equal time segments 3. 1st payment at the end of 1st period
amortization of a bond discount results in
A decrease in owners equity & decrease in the cash account
if Bonds are sold at a premium and retired as scheduled at maturity, then the cash paid to retire the bonds should.
Be the same as the maturity value (face value) of the bonds
Callable Bonds
Corp. reserves the right to buy back bonds early (company)
if a bond sells at a premium, over the life of a bond the liability will
DECREASE
If the market rate of interest is greater than the face rate then bonds are issued at a(n)
Discount
T/F if a bond sells at a premium interest exp. (per period) increases over the life of the bond
FALSE Decreases over the life
The ____ rate of interest is the rate that bondholders could obtain by investing in other bonds that are similar to the issuing firm's bonds
Face or Contract
T/F A bond which sells at a premium is always a better investment than a bond which sells at a discount
False
T/F the cash proceeds on a non-interest bearing note are higher then the principal amount of the note.
False
T/F cash paid for interest is always determined by using the selling price of the bond, the CR of interest and appropriate time period.
False (face value) * (CR)
T/F Interest exp. for a bond is always determined by using face amount (maturity value) of a bond. the CR and appropriate time period
False (previous carrying value) *(MR)
T/F If semiannual interest payments are made on a bond, you must double the number of years and halve the CR in order to use the preset value tables for calculation the selling price of the bond
False - (1/2) the MR
T/F the selling price of a bond is determined by calculation the present value of the bonds maturity value
False - only part of the equation
T/F If the CR on a bond exceeds the MR, the bond will sell at a discount
False Sells at a premium
T/F If the CR on a bond is = to the MR, a bond will sell at a premium
False sells at face value
Using the effective interest rate method of amortization, the interest expense for each period is found by multiplying the bonds' carrying value by the _____ rate
Market
If bond prices are declining then the current market rate must be...
NEGATIVE
Bonds are issued at a ______ when the issue price exceeds the face value
Premium
CR > MR
Premium
The bond issue price equals the ____ of cash flows that the bond will produce
Present value
T/F interest exp. is the difference between the amount borrowed and the amount repaid
TRUE
T/F If a bond sells at its face amount (maturity value), interest exp per period remains constant over the life of the bond
True
T/F If the MR of interest exceeds the CR on a bond, the bond will sell at a discount
True
T/F if a bond sells at a discount, interest exp. (per period) increases over the life of the bond
True
T/F the future value at the end of 3 years of $25 received today, is $33.275 assuming you can always earn %10
True
T/F the present value of $25 received today, assuming you can always earn 10%, is $25
True
T/F you are considering buying a house in 5 years and want to have a down payment of $30,000 at that time. you would need to deposit $22,320 in an account earning 6% interest, compounding semi-annually today to have $30000 in 5yrs
True
if the coupon rate on a bond exceeds the market rate of interest for comparable bonds at the time of issuance, the bond will be issued at
a PREMIUM
Coupon Rate
a fixed rate of interest paid on face value of the bond
the discount on a bond payable becomes
additional interest expense OVER THE LIFE of the bonds
What is NOT a characteristic of a bond?
bonds cannot be retired before the end of their life
Debenture Bonds
bonds that are backed only by the food faith name of the issuing company
Secure Bonds or Collateralized Bonds
bonds that are secured by assets of the issuing company
Term
bonds that mature on the same date
Serial Bonds
bonds that retire in installments (retire in series)
Convertible Bonds
can be exchanged for a stated number of shares of stock by the bondholder (you)
T/F Working capital will increase when accrued salaries are paid
false
T/F the present value of 3 payments of $10 received exactly 1 year, two years, and three years from today is $33.10 assuming you can always earn 10%
false
The stated rate of a bond sold at a premium is
higher than the market interest rate
which is false
if the explicit rate (CR) exceeds the effective yield (MR), the bonds will sell at a discount -PREMIUM NOT DISCOUNT
a bond discount has the effect of
increasing the interest expense
what is the market rate of interest for a bond issue that sells for more than its face value
less than the rate stated on the bond
The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest
plus the present value of all future interest payments at the market rate of interest
if a bond sells at face value, over the life of a bond, interest expenses will
remain constant
Market Rate
the going rate of interest that borrowers/lenders are willing to accept on the day the bond is sold.
the sale of bonds above face value
will cause the total cost of borrowing to be les than the bond interest paid