If bonds are issued at a discount, it means that the: A. bondholder will receive effectively less interest than the contractual interest rate B. financial strength of the issuer is suspect C. market interest rate is higher than the contractual interest rate D. market interest rate is lower than the contractual interest rate
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- If the market rate of interest is greater than the contractual rate of interest, bonds will sell a. at a discount b. only after the stated rate of interest is increased c. at a premium d. at face valueThe contract interest rate for bonds:A. must equal the effective interest rate.B. is greater than the effective interest rate when bonds are issued at a discount.C. has no relation to the cash flow associated with a particular bond.D. will fluctuate over the life of a bond.E. None of these.When selling bonds at a premium, the premium received effectively a.does not affect the cost of borrowing. b.increases the cost of borrowing. c.reduces the cost of borrowing. d.reduces the amount of cash received when bonds are sold.
- Which of the following about bonds is false? OA. Higher bond rating indicates higher probability of default. OB. An indenture is the legal agreement between the firm issuing the bond and the trustee who represents the bondholders. OC.Call protection period where the firm cannot call the bond for a specified period of time. OD.A mortgage bond is secured by a lien on real property. OE. Both A and B.1. To calculate a gain or loss on redemption of a bond, you compare a. The market interest rate to the contract rate b. The carrying value value of the bond to the proceeds received from the sale of the bond c. The income for the period d. The proceeds to the unamortized premium or discount 2. If the proceeds are greater than the carrying value, you will have a a. gain with a credit balance b. gain with a debit balance c. loss with a debit balance d. loss with a credit balanceWhen bonds are redeemed before maturity, how is the gain or loss on redemption determined? Why does the calculation differ for bonds issued at face value, at a premium, and at a discount?
- Which of the following is not an effect of a call provision? A. Issuer can refund the bond issue if rates decline. B. Requires the issuer to pay off the loan over its life rather than all at maturity. C. Bond investors require higher yields on callable bonds D. Upon calling bonds the issuer must pay call premium to bond holder E. All of the above are effects of a call provisionAs the bond discount is amortized, the carrying value of the bonds will increase. True False As the bond premium is amortized, the carrying value of the bonds will decrease. True False When bonds that were initially issued at a discount are redeemed at maturity, the journal entry requires a ) debit to Bonds Payable, debit to Discount on Bonds Payable, and a credit to Cash ) debit to Bonds Payable, credit to Discount on Bonds Payable, and a credit to Cash O debit to Cash, credit to Bonds Payable and a credit to Discount on Bonds Payable ) debit to Bonds Payable and a credit to Cash When bonds that were initially issued at a premium are redeemed at maturity, the journal entry requires a ) debit to Bonds Payable and a credit to Cash O debit to Bonds Payable, credit to Premium on Bonds Payable, and a credit to Cash O debit to Bonds Payable, debit to Premium on Bonds Payable, and a credit to Cash O debit to Cash, credit to Bonds Payable and a credit to Premium on Bonds Payable When bonds…Which of the following statements relating to bonds is incorrect? A. A bond’s face value is the amount the issuer must pay to the bondholder at maturity. B. The owner of a registered bond is the person to whom interest payments are mailed. C. A bond will typically sell at a discount when its nominal rate is less than the current market rate of interest. D. A bond is a debt instrument giving the issuer flexibility as to maturity date.
- .Bonds are issued at face value when: Effective rate is higher than stated rate Effective rate is lower than stated rate Cash proceeds is equal to face value Cash proceeds is not equal to face valueWhen bonds are retired at maturity, ________. A. the carrying value always equals the face value B. the carrying value equals the face value plus the unamortized premium or less the unamortized discount C. the bondholders are paid the face value plus the unamortized premium or less the unamortized discount D. the entry to retire the bonds may include a gain or loss on retirement of bondsBond 1 and Bond 2 are identical, except that Bond 2 has credit enhancement. Issuer of Bond 2 has higher credit risk compared to issuer of Bond 1. Which of the following statements is true? A. Credit risk for Bond 2 will be lower than that for Bond 1 B. Credit risk for Bond 2 will be higher than that for Bond 1 OC. Need more information to answer the question