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Question(s) / Instruction(s):

A bond traded at 102½ means that:

a)            The bond pays 2.5% interest.

b)            The bond traded at $1,025 per $1,000 bond.

c)            The market rate of interest is 2.5%.

d)            The bonds were retired at $1,025 each.

e)            The market rate of interest is 2 ½ % above the contract rate.

 

12. An advantage of bond financing is:

a)            Bonds do not affect owners' control.

b)            Interest on bonds is tax deductible.

c)            Bonds can increase return on equity.

d)            It allows firms to trade on the equity.

e)            All of these

 

13. Which of the following statements is true?

a)            Interest on bonds is tax deductible.

b)            Interest on bonds is not tax deductible

c)            Dividends to stockholders are tax deductible.

d)            Bonds do not have to be repaid.

e)            Bonds always increase return on equity.

 

14. A bondholder that owns a $1,000, 10%, 10-year bond has:

a)            Ownership rights in the issuing company.

b)            The right to receive $10 per year until maturity

c)            The right to receive $1,000 at maturity

d)            The right to receive $10,000 at maturity

e)            The right to receive dividends of $1,000 per year

15. A company's total liabilities divided by its total stockholders' equity is called the:

a)            Equity ratio.

b)            Return on total assets ratio.

c)            Pledged assets to secured liabilities ratio.

d)            Debt-to-equity ratio.

e)            Times secured liabilities earned ratio.

 

16. Bonds can be issued:

a)            At par.

b)            At a premium

c)            At a discount

d)            Between interest payment dates

e)            All of these.

 

17. When a bond sells at a premium:

a)            The contract rate is above the market rate.

b)            The contract rate is equal to the market rate.

c)            The contract rate is below the market rate.

d)            It means that the bond is a zero coupon bond.

e)            The bond pays no interest.

 

18. A company issues 9%, 20-year bonds with a par value of $750,000. The current market rate is 8%. The amount of interest owed to the bondholders for each semiannual interest payment is:

a)            $60,000

b)            $33,750

c)            $67,500

d)            $30,000

e)            $375,000

 

19. On January 1 of Year 1, Drum Line Airways issued $3,500,000 of par value bonds for $3,200,000. The bonds pay interest semiannually on January 1 and July 1. The contract rate of interest is 7% while the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized at a rate of $10,000 every six months.

The company's December 31, Year 1 balance sheet should reflect total liabilities associated with the bond issue in the amount of:

a)            $3,220,000

b)            $3,342,500

c)            $3,480,000

d)            $3,377,500

e)            $3,450,000

 

20. On January 1 of Year 1, Drum Line Airways issued $3,500,000 of par value bonds for $3,200,000. The bonds pay interest semiannually on January 1 and July 1. The contract rate of interest is 7% while the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized at a rate of $10,000 every six months.

The amount of interest expense recognized by Drum Line Airways on the bond issue in Year 1 would be:

a)            $132,500

b)            $225,000

c)            $265,000

d)            $245,000

e)            $280,000

 

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