Ch 9

A corporation that wishes to borrow from the general public rather than a bank will issue

bonds.

Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are:

secured

_________ bonds are supported by a specific asset the issuer pledges as collateral.

secured

A series of equal amounts paid or received over equal time periods is called a(n) _____________.

annuity

A formal debt instrument that obligates the borrower to repay a stated amount (referred to as the principal or face amount) at a specified maturity date can be a note or a(n)

bond

A(n) _____________ is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time.

lease

The price of a bond includes

the present value of the face amount PLUS the present value of the periodic interest payments

The two types of financing are

- equity financing. - debt financing.

Which of the following statements is correct? 1. Bonds may sell below, above, or at their face amount. 2. Bonds always sell for their face amount. 3. Bonds sell for their face amount if they are issued near the original interest date.

Bonds may sell below, above, or at their face amount.

A contract in which an owner provides a user the right to use an asset in return for periodic cash payments over a period of time is called a(n)

lease.

Quattro Lending Company is considering lending a large sum to Eleance Inc. During its decision process, Quattro should especially consider Eleance's existing:

long-term liabilities

Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance of the bonds should include debit(s) to:

- Cash for $98,000 - Discount on bonds payable for $2,000

Periodic payments on installment notes typically include

- a portion that reflects interest. - a portion that reduces the outstanding loan balance.

Financing with ___________ requires borrowing, whereas financing with ____________ requires issuing shares of stock

- debt - equity

ABC Company is in the process of issuing bonds. The bonds have a stated interest rate of 6%, which is 2% above the current market rate. What effect will the two interest rates have on the bond issue price?

The issue price will be above the bond's face value.

If ABC Company receives $100,000 cash in exchange for issuing 100 bonds at their $1,000 face value, the transaction will be recorded with a

debit to Cash of $100,000 and a credit to Bonds payable of $100,000.

True or false: When pricing a bond, the present value of the interest payments is added to the present value of the maturity value of the bond.

True

In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's:

long-term debt

When a corporation repurchases its bonds from the bondholders, the corporation ________________ the bonds.

retired

Identify the characteristics of an annuity.

- Equal time periods between payment dates - A series of amounts that are equal

Bonds may issue at:

- a discount - face amount - a premium

Bonds will be issued a premium if the stated interest rate is

greater than the market interest rate.

The journal entry to record the issuing of 100 bonds at their $1,000 face value will include a debit to ______ and a credit to ______.

- Cash -Bonds Payable

On January 1, year 1, Klondike issued 10-year bonds with a stated rate of 10% and a face amount of $100,000. The bonds pay interest annually. The market rate of interest was 12%. Calculate the issue price of the bonds. Round your answer to the nearest dollar.

$88,699

On January 1, year 1, Ziegler issued 5-year bonds with a stated rate of 8% and a face amount of $100,000. The bonds pay interest semiannually. The market rate of interest was 10%. Calculate the issue price of the bonds. Round your answer to the nearest dollar.

$92,278

Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance should include:

- A credit to bonds payable for $100,000 - A debit to discount on bonds payable for $2,000

Loans requiring periodic payments of interest and principle are referred to as ____________ notes.

installment

Which of the following statements is correct? 1. Bonds for which the effective interest rate rises must be retired early. 2. Bonds can be retired only at maturity. 3. Bonds may be retired at maturity or retired early.

Bonds may be retired at maturity or retired early.