Question 1

Bonds usually sell at their:

Accepted Answer

Bonds usually sell at their present value, which is the current market value of the bond based on its future cash flows and the prevailing interest rates.

Question 2

A $500,000 bond issue sold for $510,000. Therefore, the bonds:

Accepted Answer

The bonds sold for more than their face value, indicating they sold at a premium. This occurs when the stated interest rate is higher than the market rate, making the bonds more attractive to investors.

Question 3

Given the information below, which bond(s) will be issued at a discount? $$\begin{array} { | l | c | c | c | c | } 
\hline & \text { Bond 1 } & \underline { \text { Bond 2 } } & \underline { \text { Bond } \mathbf { 3 } } & \underline { \text { Bond 4 } } \
\hline \text { Stated Rate of Return } & 5 \% & 7 \% & 12 \% & 10 \% \
\hline \text { Market Rate of Return } & 7 \% & 8 \% & 12 \% & 9 \% \
\hline
\end{array}$$

Accepted Answer

The answer of Given the information below, which bond(s) will...

Question 4

Given the information below, which bond(s) will be issued at a premium? $$\begin{array} { | l | c | c | c | c | } 
\hline & \underline { \text { Bond 1 } } & \underline { \text { Bond 2 } } & \underline { \text { Bond 3 } } & \underline { \text { Bond 4 } } \
\hline \text { Stated Rate of Return } & 7 \% & 12 \% & 10 \% & 8 \% \
\hline \text { Market Rate of Return } & 8 \% & 10 \% & 10 \% & 9 \% \
\hline
\end{array}$$

Accepted Answer

A bond is issued at a premium when its stated rate of return is higher than the market rate of return. Bond 2 has a stated rate of 12%, which is higher than the market rate of 10%.

Question 5

The rate of interest expense incurred on a bond payable for bonds of similar risk is called the:

Accepted Answer

The rate of interest expense incurred on a bond payable for bonds of similar risk is called the market rate. This is the rate at which investors are willing to purchase similar bonds in the market. It is important for companies to use the market rate to calculate their interest expense as it reflects the current market conditions and the company's cost of borrowing. The face rate is the rate of interest that is stated on the bond certificate, the yield rate is the rate of return that an investor can expect to earn on a bond, and the stated rate is another term for the face rate.

Question 6

Raiders Company issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 12%. What is the issue price of the bond?

Accepted Answer

FV ($50,000); PMT ($2,500); I (6%); N (10 periods) = $46,320.
PMT = $50,000 x 10% x ½ year = $2,500.
I = 12%/2 semiannual periods = 6%.
N = 5 years x 2 periods each year = 10 periods.

Question 7

For a bond issue that sells for less than the bond face amount, the stated interest rate is:

Accepted Answer

When a bond issue sells for less than the bond face amount, it is referred to as a discount bond. In this case, the stated interest rate will be less than the market rate, as investors are willing to purchase the bond at a discount in order to compensate for the lower interest payments. Therefore, the stated interest rate is less than the market rate.

Question 8

Given the information below, which bond(s) will be issued at a discount? $$\begin{array} { | l | c | c | c | c | } 
\hline & \text { Bond 1 } & \text { Bond 2 } & \text { Bond 3 } & \text { Bond 4 } \
\hline \text { Stated Rate of Return } & 10 \% & 8 \% & 12 \% & 12 \% \
\hline \text { Market Rate of Return } & 12 \% & 8 \% & 15 \% & 10 \% \
\hline
\end{array}$$

Accepted Answer

The answer of Given the information below, which bond(s) will...

Question 9

Raiders Company issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 8%. What is the issue price of the bond?

Accepted Answer

FV ($50,000); PMT ($2,500); I (4%); N (10 periods) = $54,055.
PMT = $50,000 x 10% x ½ year = $2,500.
I = 8%/2 semiannual periods = 4%.
N = 5 years x 2 periods each year = 10 periods.

Question 10

Ordinarily, the proceeds from the sale of a bond issue will be equal to:

Accepted Answer

The proceeds from the sale of a bond issue represent the amount of money that the issuer receives from the sale of the bonds. This amount is generally less than the face amount of the bonds, due to the fact that the issuer must pay interest to the bondholders over the life of the bonds. The correct answer is C because the proceeds from the sale of a bond issue are equal to the present value of the face amount plus the present value of the stream of interest payments. This reflects the fact that the bondholders are effectively lending money to the issuer, and the present value of the interest payments represents the cost of that borrowing.

Question 11

The cash interest payment each period is calculated as the:

Accepted Answer

The answer of The cash interest payment each period is...

Question 12

A $500,000 bond issue sold for $490,000. Therefore, the bonds:

Accepted Answer

The bond issue sold for less than its face value ($490,000 < $500,000), which means it sold at a discount. This occurs when the market interest rate is higher than the stated rate, causing investors to demand a lower price for the bond in order to achieve an equivalent yield. Therefore, choice D is correct. Choices A, B, and C are all incorrect because they do not accurately reflect the reason for the discount.

Question 13

Given the information below, which bond(s) will be issued at a premium? $$\begin{array} { | l | c | c | c | c | } 
\hline & \underline { \text { Bond 1 } } & \underline { \text { Bond 2 } } & \underline { \text { Bond 3 } } & \underline { \text { Bond 4 } } \
\hline \text { Stated Rate of Return } & 5 \% & 10 \% & 7 \% & 10 \% \
\hline \text { Market Rate of Return } & 7 \% & 8 \% & 7 \% & 9 \% \
\hline
\end{array}$$

Accepted Answer

Bonds are issued at a premium when their coupon rate is higher than the prevailing market interest rate. Based on the information given, we know that Bonds 2 and 4 have coupon rates of 8% and the current market interest rate is 6%, which means they will be issued at a premium. Bond 1 has a coupon rate of 6%, which is the same as the market interest rate, so it will be issued at par. Bond 3 has a coupon rate of 4%, which is lower than the market interest rate, so it will be issued at a discount.

Question 14

The rate quoted in the bond contract used to calculate the cash payments for interest is called the:

Accepted Answer

The stated rate is the rate quoted in the bond contract and is used to calculate the cash payments for interest.

Question 15

Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 7% interest. The current market rate of interest is 7%. Which of the following is correct?

Accepted Answer

Bond X will sell for more than Bond Y because it pays a higher interest rate than the current market rate, while Bond Y pays a lower interest rate. Investors will be willing to pay more for Bond X to receive the higher interest payments, while they will not be willing to pay as much for Bond Y. Therefore, Bond X will sell at a premium, while Bond Y will sell at a discount.

Question 16

Which of the following is true for bonds issued at a discount?

Accepted Answer

Bonds issued at a discount have a stated interest rate that is lower than the market interest rate. This is because investors require a higher return to compensate for the fact that they are purchasing the bond at a price lower than its face value. Therefore, choice B is the correct answer.

Question 17

Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct?

Accepted Answer

Since the current market rate of interest is 8%, Bond Y which pays 9% interest is more attractive to investors, hence it will sell for a higher price than Bond X which pays 8% interest. This means that Bond Y will sell for more than Bond X.

Question 18

For a bond issue that sells for more than the bond face amount, the stated interest rate is:

Accepted Answer

The answer of For a bond issue that sells for...

Question 19

Which of the following is true for bonds issued at a premium?

Accepted Answer

Bonds issued at a premium have a stated interest rate that is higher than the current market interest rate. This is because investors are willing to pay more for the higher interest payments.

Question 20

Interest expense on bonds payable is calculated as the:

Accepted Answer

The answer of Interest expense on bonds payable is calculated...

Quiz 9: Long-Term Liabilities