Bonds that have an option exercisable by the issuer

1.

Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are known as:

A.

Convertible bonds.

B.

Sinking fund bonds.

C.

Callable bonds.

D.

Serial bonds.

E.

Junk bonds.

2.

A bond traded at 102½ means that:

A.

The bond pays 2.5% interest.

B.

The bond traded at $1,025 per $1,000 bond.

C.

The market rate of interest is 2.5%.

D.

The bonds were retired at $1,025 each.

E.

The market rate of interest is 2 ½ % above the contract rate.

3.

The contract between the bond issuer and the bondholders, which identifies the rights and obligations of the parties, is called a(n):

A.

Debenture.

B.

Bond indenture.

C.

Mortgage.

D.

Installment note.

E.

Mortgage contract.

4.

The carrying value of a long-term note payable:

A.

Is computed as the future value of all remaining future payments, using the market rate of interest.

B.

Is the face value of the long-term note less the total of all future interest payments.

C.

Is computed as the present value of all remaining future payments, discounted using the market rate of interest at the time of issuance.

D.

Is computed as the present value of all remaining interest payments, discounted using the note’s rate of interest.

E.

Decreases each time period the discount on the note is amortized.

5.

A company must repay the bank $10,000 cash in 3 years for a loan it entered into. The loan is at 8% interest compounded annually. The present value factor for 3 years at 8% is 0.7938. The present value of the loan is:

A.

$10,000.

B.

$12,400.

C.

$ 7,938.

D.

$ 9,200.

E.

$ 7,600.

$10,000 x 0.7938 = $7,938

6.

A pension plan

A.

Is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire.

B.

Can be underfunded if the accumulated benefit obligation is more than the plan assets.

C.

Can include a plan administrator who receives payments from the employer, invests them in pension assets, and makes benefit payments to pension recipients.

D.

Can be a defined benefit plan in which future benefits are set, but the employer’s contributions vary depending on assumptions about future pension assets and liabilities.

E.

All of these.

7.

Operating leases differ from capital leases in that

A.

For a capital lease the lessee records the lease payments as rent expense, but for an operating lease the lessee reports the lease payments as depreciation expense.

B.

For an operating lease the lessee depreciates the asset acquired under lease, but for the capital lease the lessee does not.

C.

Operating leases create a long-term liability on the balance sheet, but capital leases do not.

D.

Operating leases do not transfer ownership of the asset under the lease, but capital leases often do.

E.

Operating lease payments are generally greater than capital lease payments.

8.

A disadvantage of bonds is:

A.

Bonds require payment of periodic interest.

B.

Bonds require payment of principal.

C.

Bonds can decrease return on equity.

D.

Bond payments can be burdensome when income and cash flow are low.

E.

All of these.

9.

A company’s total liabilities divided by its total stockholders’ equity is called the:

A.

Debt ratio.

B.

Return on total assets ratio.

C.

Pledged assets to secured liabilities ratio.

D.

Debt-to-equity ratio.

E.

Times secured liabilities earned ratio.

10.

When a bond sells at a premium:

A.

The contract rate is above the market rate.

B.

The contract rate is equal to the market rate.

C.

The contract rate is below the market rate.

D.

It means that the bond is a zero coupon bond.

E.

The bond pays no interest.

11.

A company issues 9%, 20-year bonds with a par value of $750,000. The current market rate is 9%. The amount of interest owed to the bondholders for each semiannual interest payment is.

A.

$ 0.

B.

$ 33,750.

C.

$ 67,500.

D.

$ 750,000.

E.

$1,550,000.

$750,000 x .09 x ½ year = $33,750

12.

Amortizing a bond discount:

A.

Allocates a part of the total discount to each interest period.

B.

Increases the market value of the Bonds Payable.

C.

Decreases the Bonds Payable account.

D.

Decreases interest expense each period.

E.

Increases cash flows from the bond.

13.

A company issued 5-year, 7% bonds with a par value of $100,000. The company received $97,947 for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is:

A.

$3,294.70.

B.

$3,500.00.

C.

$3,705.30.

D.

$7,000.00.

E.

$7,410.60.

Cash interest paid: $100,000 x .07 x ½ year = $3,500
Discount amortization: ($100,000 – $97,947)/10 periods = $205.30
Interest expense = $3,500 + $205.30 = $3,705.30

14.

Financial statement analysis:

A.

Is the application of analytical tools to general-purpose financial statements and related data for making business decisions.

B.

Involves transforming accounting data into useful information for decision-making.

C.

Helps users to make better decisions.

D.

Helps to reduce uncertainty in decision-making.

E.

All of these.

15.

The building blocks of financial statement analysis include:

A.

Liquidity and efficiency.

B.

Solvency.

C.

Profitability.

D.

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