chapter 10 A-304

The specific promises made to bondholders are described in a document called a bond " "

contract

Bonds are issued at a discount when the bond's stated interest rate is Blank______ the market interest rate. Multiple choice question. lower than equal to higher than

lower than

A bond's " " date is the date on which the bond principal will be repaid in full.

maturity

When the market interest rate is the same as the stated interest rate, then the bond will sell at Blank______. Multiple choice question. a discount a premium

par

On the maturity date, the bondholders of $100,000 of bonds payable that were issued at $90,000 will receive Blank______. Multiple choice question. $100,000 in cash plus the interest owed $90,000 in cash plus the interest owed nothing, since there is no transaction on the maturity date.

$100,000 in cash plus the interest owed

The cash payment of interest on a $1,000, 12%, 8-year bond that pays interest quarterly and was issued at $980 equals Blank______. Multiple choice question. $980 x 12% x 1/8 $980 x 12% x 1/4 $1,000 x 12% x 4 $980 x 12% x 4 $1,000 x 12% x 1/8 $1,000 x 12% x 1/4

$1,000 x 12% x 1/4

If a company's 12%, $1,000 bond pays interest quarterly, how much will the bondholder interest payment equal? Multiple choice question. $30 $480 $120 $0

30

True or false: At the date of issue, the stated rate of interest on the bond is always equal to the market rate of interest on the bond.

False

Which is a riskier form of financing for a business? Multiple choice question. Issuing stocks Issuing bonds

Issuing bonds

A bond's maturity date is the date Blank______. Multiple choice question. on which periodic interest payments are due that the bond was issued on which the bond principal will be repaid in full

on which the bond principal will be repaid in full

The price of a bond equals the present value of the Blank______. Multiple choice question. periodic interest payments principal amount plus the present value of the periodic interest payments principal amount minus the present value of the periodic interest payments

principal amount plus the present value of the periodic interest payments

Bondholders are willing to pay a premium to acquire a bond because the Blank______. Multiple choice question. bond's stated interest rate is lower than the market interest rate bond's stated interest rate is higher than the market interest rate bond's stated interest rate is equal to the market interest rate company has a low credit rating

bond's stated interest rate is higher than the market interest rate

If you purchase a bond that matures in 20 years, then you Blank______. Multiple choice question. have to wait 20 years before your cash investment is repaid can sell it at any time to the US Treasury have to wait 20 years before you are repaid by the US Treasury can sell it at any time on the bond market

can sell it at any time on the bond market

The interest rate written on a bond is called the " " rate, " " rate, " " rate, or " " rate of interest

contract coupon nominal stated

ABC Corporation issued $100,000, 6% bonds that mature in 10 years for $101,000. The annual interest payments made on these bonds equals $

$6000

To compute the cash payment of interest on a $1,000, 5% bond that pays interest semiannually and was issued at a price of $1,010 requires multiplying which of the following items? (Check all that apply.) Multiple select question. 2 $1,000 5% $1,010 1/2

1000 5% 1/2

The advantages of bond exchanges (bond markets) include which of the following? (Check all that apply.) Multiple select question. Allows corporations to reduce the cost of long-term borrowing Provides a place to exchange stocks Provides liquidity to creditors Allows corporations to increase the cost of their debt Allows creditors to sell bonds prior to maturity

Allows corporations to reduce the cost of long-term borrowing Provides liquidity to creditors Allows creditors to sell bonds prior to maturity

Which of the following are reasons a company would want to issue bonds instead of stock? (Check all that apply.) Multiple select question. Current stockholders maintain control. Interest expense is tax-deductible. The cost of borrowing is greater than the return on equity. Dividends are tax-deductible.

Current stockholders maintain control. Interest expense is tax-deductible.

The rate used to calculate the amount of interest payments on bonds is called the Blank______rate.

coupon

The market interest rate on a bond is the interest rate Blank______. Multiple choice question. stated on the bond and is used to calculate interest expense investors demand on the day a bond is issued and is used to calculate interest expense investors demand on the day a bond is issued and is used to calculate the interest payments stated on the bond and is used to calculate the interest payments

investors demand on the day a bond is issued and is used to calculate interest expense

Although a bond may require interest payments more than once a year, a bond's coupon rate is Blank______. (Check all that apply.) Multiple select question. used to calculate interest payments always expressed as an annual interest rate increased when the market price of the bond falls affected by the price investors pay for the bond

used to calculate interest payments always expressed as an annual interest rate

Interest expense is reported on the income statement Blank______. Multiple choice question. below operating income above cost of goods sold below net income above gross profit

below operating income

A $1,000, 6% bond that matures in 10 years is issued for $1,010. The interest is paid semiannually. Each interest payment equals $

30 $1000*(.06*(1/2))=30

Which of the following correctly describes a bond indenture? Multiple choice question. A document detailing the promises made by the bond issuer. The relationship between the effective interest and the stated interest rates. The portfolio of bonds that are issued during a particular fiscal period.

A document detailing the promises made by the bond issuer.

True or false: Bond issuers must make interest payments only once a year. True false question.TrueFalse

False

Which of the following is tax deductible? Multiple choice question. Interest expense on bonds Debt covenants Bond principal Dividends paid to shareholders

Interest expense on bonds

An advantage to financing with debt is that Blank______. Multiple choice question. dividends reduce retained earnings whereas interest expense does not reduce retained earnings interest does not have to be paid until the maturity date dividends are tax deductible interest is tax deductible

interest is tax deductible

The bond's principal, which is the amount to be repaid by the maturity date may also be called the bond's " " value.

par, face, maturity

Which interest rate should be used in computing the present value of a bond at the date of issuance and the interest expense incurred on the bond? Multiple choice question. market stated maturity coupon

market

The Blank______ is the interest rate on the date the bonds are issued and used to determine the amount of interest expense. (Select all that apply.) Multiple select question. market rate of interest effective rate of interest yield stated rate of interest coupon interest rate

market rate of interest effective rate of interest yield

The amount to be paid at the end of the bond's life is the called Blank______. Multiple choice question. effective payment conversion coupon payment principal

principal

If a bond pays interest semi-annually, when determining the price of a bond, the present value of interest payments will equal the present value of an annuity x Blank______. Multiple choice question. principal x annual market rate x 1/2 principal x annual stated rate x 1/2 principal x annual stated rate x 2 principal x annual market rate x 2

principal x annual stated rate x 1/2

The bond issuer prepares a Blank______, which is a regulatory document that describes the company, the bonds, and how the proceeds of the bonds will be issued. Multiple choice question. principal prospectus covenant stock

prospectus

Which of the following are disadvantages of issuing bonds instead of stock? (Check all that apply.) Multiple select question. Dividends are legal obligations. Bonds are riskier than stock. Interest payments have a negative impact on cash flows. Interest payments are tax-deductible. Interest payments are legal obligations.

Bonds are riskier than stock. Interest payments have a negative impact on cash flows. Interest payments are legal obligations.

The advantages of bond exchanges (bond markets) include which of the following? (Check all that apply.) Multiple select question. Allows corporations to increase the cost of their debt Provides liquidity to creditors Allows corporations to reduce the cost of long-term borrowing Allows creditors to sell bonds prior to maturity Provides a place to exchange stocks

Provides liquidity to creditors Allows corporations to reduce the cost of long-term borrowing Allows creditors to sell bonds prior to maturity

How would Skaters World, Inc.'s return on equity (ROE) be different if the company were to issue $200,000 of 10% bonds instead of $200,000 in stock? Assume income before interest and taxes is estimated to be $100,000, income taxes are 35% and stockholders' equity is initially $300,000. Multiple choice question. ROE would be lower with bonds. ROE would be the same. ROE would be higher with bonds.

ROE would be higher with bonds.

XYZ Company is in the process of issuing bonds. The bonds have a stated interest rate of 4%, which is 2% below the current market rate. What effect will the two interest rates have on the bond issue price? Multiple choice question. The issue price will be below the bond's face value. The issue price will be above the bond's face value. The issue price will equal the bond's face value.

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

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

True

Businesses finance their operations using a mixture of Blank______. Multiple choice question. capital investments, such as issuing stock and equity, such as issuing bonds interest and dividends debt, such as issuing bonds, and equity, such as issuing stock debt, such as issuing stock, and borrowings, such as issuing bonds

debt, such as issuing bonds, and equity, such as issuing stock

How would return on equity be different if a company were to issue $100,000 of 10% bonds instead of $100,000 in stock? Assume income before interest and taxes is estimated to be $100,000, income taxes are 21% and stockholders' equity is initially $200,000. Return on equity would be Blank______. Multiple choice question. higher with bonds would be the same lower with bonds

higher with bonds

The reason bonds sell at their face value is because Blank______. Multiple choice question. the market interest rate equals the stated interest rate that is what will be repaid at maturity the present value of the bond is less than the face value the market interest rate is greater than the coupon rate

the market interest rate equals the stated interest rate