Understanding Bond Types and Pricing
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Questions and Answers

Bonds that are secured by real estate are termed?

  • serial bonds
  • mortgage bonds (correct)
  • debentures
  • bearer bonds
  • Bonds issued against the general credit of the borrower are called?

  • mortgage bonds
  • sinking fund bonds
  • callable bonds
  • debenture bonds (correct)
  • Bonds that may be exchanged for ordinary shares at the option of the bondholders are called?

  • convertible bonds (correct)
  • callable bonds
  • share bonds
  • options
  • Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called?

    <p>callable bonds</p> Signup and view all the answers

    Bonds that have specific assets of the issuer pledged as collateral are?

    <p>secured bonds</p> Signup and view all the answers

    A bond secured by specific assets set aside to redeem the bonds is called?

    <p>sinking fund bond</p> Signup and view all the answers

    The interest rate investors demand for loaning funds is the?

    <p>market interest rate</p> Signup and view all the answers

    Companies with good credit ratings use ___________________ bonds extensively?

    <p>debenture bonds</p> Signup and view all the answers

    What is the selling price of a bond with a face value of HK $200,000 and a quoted price of 102⅛?

    <p>HK $204,250</p> Signup and view all the answers

    If a bond has a face value of €1,000 and a quoted price of 98, what amount is it selling for?

    <p>€980</p> Signup and view all the answers

    When the market interest rate is higher than the contractual interest rate, how will the bonds sell?

    <p>At a discount</p> Signup and view all the answers

    What will happen to the total cost of borrowing if bonds are issued at a discount?

    <p>It will increase</p> Signup and view all the answers

    A €10,000, 6%, 10-year bond pays interest annually and the market interest rate is 5%. How will this bond sell?

    <p>Greater than face value</p> Signup and view all the answers

    What is the gain on redemption for a bond with a carrying value of HK $590,000 and a redemption price of HK $600,000?

    <p>HK $2,000</p> Signup and view all the answers

    If the face value of a bond is HK $200,000 and the bonds are sold at a premium, how does it affect the overall borrowing cost?

    <p>Decreases the overall cost</p> Signup and view all the answers

    The selling price of a €10,000, 5-year bond will be less than €10,000 if:

    <p>The contractual interest rate is less than the market interest rate</p> Signup and view all the answers

    What type of financial outcome is realized when bonds are redeemed at a higher price than their carrying value?

    <p>Gain on bond redemption</p> Signup and view all the answers

    What is the correct method to calculate the gain or loss on bond redemption?

    <p>Carrying value minus Redemption price</p> Signup and view all the answers

    What loss would Brooks Company report on its 2020 income statement after redeeming the bonds?

    <p>€11,200 loss</p> Signup and view all the answers

    If Choe Company redeems its bonds at 101, what is the resulting gain?

    <p>HK $4,600 gain</p> Signup and view all the answers

    What is the cash amount Lane would pay its bondholders if the bonds are retired at 103?

    <p>$820,910</p> Signup and view all the answers

    How is the carrying value of bonds typically calculated?

    <p>Face Value plus Unamortized Premium</p> Signup and view all the answers

    What does a loss on bond redemption indicate?

    <p>Bonds were sold below carrying value</p> Signup and view all the answers

    What factor influences the gain or loss on bond redemption?

    <p>Carrying value and redemption price</p> Signup and view all the answers

    What is the redemption loss incurred by Robin Corporation when retiring its bonds?

    <p>£2,040</p> Signup and view all the answers

    What happens to the principal balance of a long-term note payable over time?

    <p>It decreases each period.</p> Signup and view all the answers

    How are mortgage notes payable classified in the statement of financial position?

    <p>As both current and noncurrent liabilities.</p> Signup and view all the answers

    What component of an installment payment increases over the term of a mortgage note payable?

    <p>Portion allocated to payment of principal.</p> Signup and view all the answers

    What is the process to determine the total amount payable when redeeming bonds at a premium?

    <p>Face value multiplied by selling price.</p> Signup and view all the answers

    Which financial statement section reports liabilities like mortgage notes payable?

    <p>Statement of financial position.</p> Signup and view all the answers

    What effect does the issuance of bonds at a premium have on loss during redemption?

    <p>It diminishes the overall loss.</p> Signup and view all the answers

    What is included in the interest expense of each installment payment for a fixed interest rate mortgage?

    <p>It decreases over the term.</p> Signup and view all the answers

    What is the total amount of noncurrent liabilities reported for Otam Corp. at the end of 2020?

    <p>€2,085,000</p> Signup and view all the answers

    How is the debt to assets ratio for Barker Co. calculated?

    <p>Total Liabilities divided by Total Assets</p> Signup and view all the answers

    What signifies a lease term of less than one year on the statement of financial position?

    <p>Current liability portion of the lease liability</p> Signup and view all the answers

    Which statement is true regarding the recording of leases?

    <p>Lessee records a lease liability and an asset for all leases.</p> Signup and view all the answers

    If Otam Corp. has €1,650,000 in Bonds Payable, what is the primary component of its noncurrent liabilities?

    <p>Bonds Payable</p> Signup and view all the answers

    Which amount corresponds to the current liabilities of Barker Co.?

    <p>£40 million</p> Signup and view all the answers

    What is the correct total of current and noncurrent liabilities for Otam Corp. based on the provided information?

    <p>€2,085,000</p> Signup and view all the answers

    To calculate the debt to assets ratio, which values are required?

    <p>Total Liabilities and Total Assets</p> Signup and view all the answers

    Study Notes

    Bond Types

    • Bonds secured by real estate are called mortgage bonds.
    • Bonds issued against the general credit of the borrower are called debenture bonds.
    • Bonds that can be exchanged for ordinary shares at the bondholder's option are called convertible bonds.
    • Bonds that can be retired at a stated dollar amount before maturity at the issuer's option are called callable bonds.
    • Bonds with specific assets pledged as collateral are called secured bonds.
    • Bonds secured by specific assets set aside to redeem the bonds are called sinking fund bonds.

    Bond Pricing

    • The interest rate investors demand for loaning funds is the market interest rate.
    • Bonds sell at a discount when the market interest rate is greater than the contractual interest rate.
    • The total cost of borrowing is increased when bonds are issued at a discount.
    • Bonds sell at a premium when the market interest rate is less than the contractual interest rate.

    Bond Redemption

    • Bond redemption occurs when a company buys back its bonds before maturity.
    • A gain on bond redemption occurs when the carrying value of the bond is less than the redemption price.
    • A loss on bond redemption occurs when the carrying value of the bond is greater than the redemption price.

    Notes Payable

    • Long-term notes payable are reported as both current and noncurrent liabilities.
    • The portion of a note payable expected to be paid in the next year is reported as a current liability.
    • Each installment payment on a mortgage note payable includes interest and a payment on the principal.
    • With each installment payment, the portion allocated to interest expense decreases and the portion allocated to principal increases.

    Leverage and Debt Ratios

    • Companies use leverage to increase their return on equity.
    • The debt to assets ratio is calculated by dividing total liabilities by total assets.

    Lease Accounting

    • The appearance of a Leased Liability account on the statement of financial position indicates a lease term of more than one year.
    • The portion of a lease liability expected to be paid in the next year is reported as a current liability.

    Financial Statement Presentation

    • Noncurrent liabilities are reported on the statement of financial position after current liabilities.
    • Current liabilities are obligations that are expected to be paid within one year.

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    Description

    This quiz covers essential concepts related to bond types, including mortgage bonds, debenture bonds, and callable bonds. It also addresses bond pricing strategies, such as selling at a discount or premium. Test your knowledge on these fundamental aspects of finance.

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