ACCT 211- Ch. 10, 11, and 12 Final
Review Exam Questions And Correct
Answers.
Bond - Answer Its issuer's written promise to pay an amount equaling the par value of the bond with
interest
Par (or face) value of a bond - Answer is paid at a stated future date known as the bond's maturity
date; most bonds require the issuer to make semiannual interest payments; interest paid each period is
computed by multiplying the par value of the bond by the bond's contract rate
Advantages of bonds - Answer 1. Bonds do not affect owner control: contributing money to a company
would mean you are part owner, but bonds don't have any ownership rights
2. Interest on bonds is tax deductible: bond interest payments are tax deductible for the issuer, but
distributions to owners are not
3. Bonds can increase return on equity: a company that earns a higher return with borrowed funds than
it pays in interest on those funds increases its return on equity (called "financial leverage" or "trading on
the equity")
Disadvantages of bonds - Answer 1. bonds can decrease return on equity: when a company earns a
lower return with the borrowed funds than it pays in interest, it decreases return on equity
2. bonds require payment of both periodic interest and the par value at maturity: bond payments are a
burden when income and cash flow are low, with equity financing this isn't a concern because payments
(dividends) are only paid when the owner wants to pay them
Bond market values - Answer Expressed as a percent of par (face) value.
EX: a bond trading at 103 1/2 is bought or sold for 103.5% of par value. A bond trading a 95 is bought or
sold at 95% of par value
Bond indenture - Answer the legal document describing the rights and obligations of both the
bondholders and the issuer; legal contract between issuer and bondholders that also specifies when
interest is paid
, Bond certificate - Answer Document containing bond specifics such as issuer's name, bond par value,
contract interest rate, and maturity date.
-Can be used as evidence of a company's debt
Par bonds - Answer Bonds with a price equal to par value are said to be selling at par. The yield to
maturity of a par bond is equal to its coupon rate. Is a par bond when the contract rate and the market
rate are equal.
-Initially: Debit cash for par value, credit bonds payable for par value
-1st semiannual interest payment: debit bond interest expense, credit cash
-At maturity: Debit bonds payable for par value, credit cash for par value
Contract rate - Answer Interest rate specified in a bond indenture (or note); multiplied by the par value
to determine the interest paid each period; also called coupon rate, stated rate, or nominal rate.
Discount Bond - Answer A bond that sells below its par value; occurs whenever the going rate of
interest is above the coupon rate. (Contract rate is less than market rate)
-Bond issuer pays interest rate specified in the indenture
-Annual interest paid is computed by multiplying the bond par value by the contract rate
-Contract rate is usually stated on an annual basis (even when interest is paid semiannually)
-The contract rate sets the interest the issuer pays in cash but that does not mean that is the bond
interest expense
Market rate - Answer is the rate that borrowers are willing to pay and lenders are willing to accept for a
bond and its risk level. As risk increases, market rate increases to compensate purchasers for the bonds'
increased risk. Market rate is also usually higher when the time until the bond matures is longer
Discount on bonds payable - Answer occurs when a company issues bonds with a contract rate less
than the market rate. Means the issue price is less than par value-- the issuer gets less money at
issuance than what the issuer must pay back at maturity
Review Exam Questions And Correct
Answers.
Bond - Answer Its issuer's written promise to pay an amount equaling the par value of the bond with
interest
Par (or face) value of a bond - Answer is paid at a stated future date known as the bond's maturity
date; most bonds require the issuer to make semiannual interest payments; interest paid each period is
computed by multiplying the par value of the bond by the bond's contract rate
Advantages of bonds - Answer 1. Bonds do not affect owner control: contributing money to a company
would mean you are part owner, but bonds don't have any ownership rights
2. Interest on bonds is tax deductible: bond interest payments are tax deductible for the issuer, but
distributions to owners are not
3. Bonds can increase return on equity: a company that earns a higher return with borrowed funds than
it pays in interest on those funds increases its return on equity (called "financial leverage" or "trading on
the equity")
Disadvantages of bonds - Answer 1. bonds can decrease return on equity: when a company earns a
lower return with the borrowed funds than it pays in interest, it decreases return on equity
2. bonds require payment of both periodic interest and the par value at maturity: bond payments are a
burden when income and cash flow are low, with equity financing this isn't a concern because payments
(dividends) are only paid when the owner wants to pay them
Bond market values - Answer Expressed as a percent of par (face) value.
EX: a bond trading at 103 1/2 is bought or sold for 103.5% of par value. A bond trading a 95 is bought or
sold at 95% of par value
Bond indenture - Answer the legal document describing the rights and obligations of both the
bondholders and the issuer; legal contract between issuer and bondholders that also specifies when
interest is paid
, Bond certificate - Answer Document containing bond specifics such as issuer's name, bond par value,
contract interest rate, and maturity date.
-Can be used as evidence of a company's debt
Par bonds - Answer Bonds with a price equal to par value are said to be selling at par. The yield to
maturity of a par bond is equal to its coupon rate. Is a par bond when the contract rate and the market
rate are equal.
-Initially: Debit cash for par value, credit bonds payable for par value
-1st semiannual interest payment: debit bond interest expense, credit cash
-At maturity: Debit bonds payable for par value, credit cash for par value
Contract rate - Answer Interest rate specified in a bond indenture (or note); multiplied by the par value
to determine the interest paid each period; also called coupon rate, stated rate, or nominal rate.
Discount Bond - Answer A bond that sells below its par value; occurs whenever the going rate of
interest is above the coupon rate. (Contract rate is less than market rate)
-Bond issuer pays interest rate specified in the indenture
-Annual interest paid is computed by multiplying the bond par value by the contract rate
-Contract rate is usually stated on an annual basis (even when interest is paid semiannually)
-The contract rate sets the interest the issuer pays in cash but that does not mean that is the bond
interest expense
Market rate - Answer is the rate that borrowers are willing to pay and lenders are willing to accept for a
bond and its risk level. As risk increases, market rate increases to compensate purchasers for the bonds'
increased risk. Market rate is also usually higher when the time until the bond matures is longer
Discount on bonds payable - Answer occurs when a company issues bonds with a contract rate less
than the market rate. Means the issue price is less than par value-- the issuer gets less money at
issuance than what the issuer must pay back at maturity
