Bond Basics

Question 1

Liabilities classified as contracts that represent a promise to pay are known as…

Answer 1

bonds

Question 2

Most bonds are issued with a face value of this dollar amount

Answer 2

$1000

Question 3

This key interest rate in bond calculation is:
- the rate stated in the bond contract
- used to compute the amount of interest paid to bondholders

Answer 3

coupon rate / contract rate / stated rate

Question 4

This key interest rate in bond calculation is:
- the rate that investors expect to earn on a debt
- used to price a bond issue

Answer 4

market rate / yield rate

Question 5

When bonds are issued at par…

Answer 5

the coupon rate = the market rate

Question 6

When bonds are issued at a premium…

Answer 6

the coupon rate > the market rate

Question 7

When bonds are issued at a discount…

Answer 7

the coupon rate < the market rate

Question 8

Premiums on bonds payable are recorded in the journal entry as a…

Answer 8

supra liability account

Question 9

Discounts on bonds payable are recorded in the journal entry as a…

Answer 9

contra liability account

Question 10

When bonds are sold at a discount, the effective cost of debt is (greater/lesser) when compared to sold at par.

Answer 10

greater

Question 11

When bonds are sold at a premium, the effective cost of debt is (greater/lesser) when compared to sold at par.

Answer 11

lesser

Question 12

This is the equation to calculate the interest expense on bonds.

Answer 12

interest expense =
(principal) x (annual rate) x (portion of year outstanding)