Bonds & LT Notes Flashcards
What is the term used to describe the retirement of debt before its schedule maturity date?
Early extinguishment of debt
What happens to any discount or premium on debt by the maturity date?
It is systematically reduced to zero
When debt is retired for less than its book value, what financial outcome is recorded?
A gain
What is one reason corporations might issue convertible bonds instead of straight debt?
To sell the bonds at a higher price.
How do convertible bonds benefit smaller firms or debt-heavy companies?
They provide access to the bond market.
Why might shareholders resist the direct issuance of additional equity?
It dilutes their ownership.
What is one benefit of including detachable stock purchase warrants in a bond issue?
It enables the company to issue debt when borrowing would otherwise be difficult.
How are the issue prices allocated between bonds and detachable stock purchase warrants?
On the basis of their fair values.
What is one key difference between convertible bonds and bonds with detachable warrants?
Bonds with detachable warrants can be exercised independently of the bonds.
What is the most common form of corporate debt?
Bonds
Why might a company prefer to issue bonds rather than signing a large promissory note?
To mange smaller, more manageable liabilities.
What is typically the maturity range for bonds issued by corporations?
10 to 40 years.
What is the primary purpose of a bond indenture?
To describe the specific promises made to bondholders.
Who typically holds the bond indenture on behalf of the bondholders?
A trustee, usually a commercial bank of financial institutions.
What differentiates a debenture bond from other types of bonds?
It is backed only by the full faith and credit of the issuing corporation.
What primary characteristic makes a mortgage bond less risky than a debenture?
It is backed by a lien on specified real estate.
What is a key difference between registered bonds and coupon bonds?
Registered bonds have the owner’s name registered with the issuing company.
What is the purpose of the call feature in corporate bonds?
To allow the issuing company to buy back bonds before maturity.
What is a ‘no call’ provision in the context of bonds?
A rule that prohibits bond calls during the initial years of a bond’s life.
How are serial bonds typically retired?
In installments during the life of the issue.
Adams Corporation’s balance sheet reports $100 million in bonds payable. Felix Company who purchased some of Adams’ bonds will report the bonds as
a. a prepaid asset.
b. equity.
c. an investment.
d. a receivable.
c. an investment.
Choose the statement that best describes the type of financial instruments that are commonly issued in today’s markets.
a. Capital markets have abandoned “exotic” financial instruments.
b. “Exotic” financial instruments currently are prohibited by the SEC.
c. “Exotic” financial instruments continue to be developed and offered to investors.
c. “Exotic” financial instruments continue to be developed and offered to investors.
The requirements of a future payment of a specific or estimated amount of cash, at a specific or projected date are characteristics of debt. Identify another common characteristic.
a. Periodic interest must be paid
b. Periodic interest is incurred
c. Periodic principal payments must be made
b. Periodic interest is incurred
Periodic interest expense on liabilities is calculated by multiplying the effective interest rate by the amount of debt
a. that has to be repaid at maturity.
b. referred to as the par value.
c. referred to as the face amount.
d. outstanding during the interest period.
d. outstanding during the interest period.
Which of the following is an advantage of issuing bonds?
a. the total loan is broken into many parts, making it easier to find lenders.
b. the interest rate on bonds is always lower than the bank loans.
c. the fees associated with obtaining the funds are typically lower than for other large loans.
a. the total loan is broken into many parts, making it easier to find lenders.
The mirror image of a liability is an asset. The mirror image of investments in bonds is _________ _________.
bonds payable
The periodic interest paid by the issuer of a bond is referred to as the
a. market rate.
b. effective rate.
c. stated rate.
d. yield rate.
c. stated rate.
Periodic interest expense on liabilities is calculated by multiplying the amount of debt outstanding during the period by the
a. effective interest rate
b. current rate of return
c. coupon rate
d. stated interest rate
a. effective interest rate
Periodic interest paid y the issuer of a bond is referred to as the
a. market rate
b. yield rate
c. stated rate
d. effective rate
c. stated rate`
A ________ bond is backed by a lien on specified real estate owned by the issuer.
mortgage
A bond that is secured only by the full faith and credit of the issuing corporation is referred to as a(n):
a. serial bond
b. indenture bond
c. debenture bond
d. secured bond
b. indenture bond
Bonds that can be bought back by the issuer at a specified price prior to the bonds maturity date are referred to as ________ bonds.
Callable
Which of the following are terms that can be used to refer to the periodic interest rate paid by bond issuers?
a. stated rate
b. nominal rate
c. coupon rate
d. effective rate
e. market rate
a. stated rate
b. nominal rate
c. coupon rate
Bonds requiring pre specified, year by year redemptions are called ________ __________ debentures.
sinking fund
Registered bonds are issued ___________, and bearer bonds _________ ________.
present day, years ago
The periodic interest paid by the issuer of a bond is referred to as the
a. yield rate
b. market rate
c. stated rate
d. effective rate
c. stated rate
Convertible bonds are retired when bondholders choose to convert them into shares of __________.
stock
On January 1, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semiannually on June 30 and December 31. The bonds mature in 5 years. The bonds were issued at face amount. All the bonds are privately placed with one investor. On the date of issue, the investor should record what journal entry?
(DR) Investment in bonds 200,000
(CR) Cash 200,000
Bonds that retire in installments during all or part of the life of the bond issue are called _________ bonds.
serial
On September 30th, year 1, Wald Corporation issues 20-year bonds that pay interest semi-annually on June 30 and December 31. The interest accrued between June 30, year 1 and September 30, year 1 will be
a. ignored
b. deducted from the bond issue price
c. accrued and added to the bond issue price
c. accrued and added to the bond issue price
A bond that sells for less than its face amount is sold at a ___________
discount
On January 1, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semiannually on June 30 and December 31. The bonds mature in 5 years. The bonds were issued at face amount. On the date of issue, Meister should recognize a liability of
$200,000
Jennifer, an Intermediate Accounting student, wants to determine whether a particular bond issue will sell at face amount, a premium, or discount without calculating the actual issue price. Jennifer should compare the Blank______ and the Blank______.
Stated interest rate; market interest rate
On April 1, year 1, Norman Company issues $200,000 of 6% bonds. The market rate of interest is 6%. Interest of $6,000 is payable semi-annually on June 30 and December 31. The indenture is dated January 1, year 1, and the bonds mature 5 years from that date. On the date of issue, the price of the bonds will be equal to
$203,000
Need to accrue interest for 3 months since it was issued on April 1, year 1.
Semi annual interest = $6,000
6m/2 = 3 months = $3,000
On January 1, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The market yield for bonds of similar risk and maturity is 7%. What is the issue price of the bonds?
$191,684
=PV(0.07/2,10,6000,200000,0)
On January 1, Schneider Company issues $100,000 of 7% bonds. Interest of $3,500 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The market yield for bonds of similar risk and maturity is 8%. What is the price of the bonds?
$95,944
=PV(0.08/2,5*2,3500,100000,0)
A new bond issue that offers an 8% stated interest rate, while bonds of similar risk return 10%, will sell at:
a discount
Recording interest each period as the effective rate of interest multiplied by the outstanding balance of the debt during the interest period is referred to as the _______ _______ method.
effective interest
Which of the following is correct regarding the effective interest method?
a. Interest is recorded equal to the effective interest rate multiplied by the issue price.
b. Interest is paid equal to the effective interest rate multiplied by the outstanding balance of the debt.
c. Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt.
c. Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt.
