F5/M4 Bonds: Part 1

Question 1

What is a Bond Indenture

Answer 1

Document that describes the contract between the two parties

Question 2

What is an Debenture

Answer 2

Unsecured bond

Question 3

Convertible bonds; Nondetachable and detachable

Answer 3

Nondetachable: Convertible bond must be converted into capital stock

Detachable: Surrender warrants plus cash, not bond

Question 4

Zero coupon bonds

Answer 4

“Deep discount bonds”
No stated interest rate, rather a discount and redeemed at face value with no periodic interests payments
No Periodic interest payments

Question 5

(T/F): Zero coupon bonds, bonds with no stated interest rate, have periodic interest payments

Answer 5

False

Principle and interest is paid at maturity

Question 6

(T/F): ONLY NOTES REQUIRES ALLOCATIONS BETWEEN PRINCIPLE AND INTEREST

Answer 6

True; Bonds pay Principle only at maturity

Question 7

(T/F): For BONDS, principle payoff is always the full face amount at maturity

Answer 7

True

Question 8

How to calculate the price of a bond

Answer 8

PV of future principal payments (+) PV of future periodic interest payments
- Use the prevailing market rate

Question 9

(T/F): Bonds issuance costs reduce the carrying amount of the bond. Bond proceeds are recorded net of bond issuance costs.

Answer 9

TRUE

Question 10

(T/F): Bonds issuance costs are amortized as interest expense over the life of the bond

Answer 10

TRUE

Question 11

Bond issuance costs include

Answer 11

• Legal fees
• Underwriting fees
• Accounting fees
• Printing